Form I-407: Abandonment of Green Card & U.S. Tax Rules
Form I-407: Even though Form I-407 is an immigration form that is filed with USCIS, it may result in unforeseen tax consequences with the IRS. While for many Legal Permanent Residents (aka Green Card Holders) filing Form I 407, which is the I 407, Record of Abandonment of Lawful Permanent Resident Status will relinquish their green card and remove them from U.S. tax consequences — the same may not be true for Long-Term Residents.
As provided by USCIS:
Form I-407, Record of Abandonment of Lawful Permanent Resident Status, is designed to provide a simple procedure to record an alien’s abandonment of status as a lawful permanent resident (LPR) of the United States.
Use of Form I-407 also ensures that an alien abandoning their LPR status is informed of the right to a hearing before an immigration judge and that the alien has knowingly, willingly, and affirmatively waived that right.
U.S. Tax Implications
While the filing of the form I 407 may help you relinquish your green card, it does not eliminate your need to complete a form 8854, if you qualify as a Long-Term Resident.
Long-Term Resident Tax
For U.S. citizens, it does not come as much of a surprise that there may be an exit tax for renouncing your citizenship, but it often comes as a surprise to a green card holder (aka Legal Permanent Resident) who is not even considered a U.S. citizen.
From their perspective (understandably so) they are just giving back their green card, so why would they have to follow that up with a complicated and many times unnecessary exit tax form 8854 filing?
Oftentimes the assets were acquired with money that was earned or generated from money earned before becoming a Legal Permanent Resident.
Threshold Question: Are You a U.S. Citizen or Long Term Resident?
Expatriation tax provisions apply to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated).
Form 8854 is used by individuals who have expatriated on or after June 4, 2004.
Does it Apply to U.S. Citizens?
Yes. The following is a breakdown of when a U.S. Citizen is considered to have expatriated.:
U.S. Citizen – Day of Relinquishment of Citizenship
You are considered to have relinquished your U.S. citizenship on the earliest of the following dates:
– The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).
– The date you furnished to the State Department a signed statement of your voluntary relinquishment of a U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).
– The date the State Department issued a certificate of loss of nationality.
– The date a U.S. court canceled your certificate of naturalization.
Are All Legal Permanent Residents Required to File a Form 8854?
In order to be required to file this form, the person must be considered a long-term permanent resident, or stated another way – the person is a Legal Permanent Resident, who is a “Long-Term Resident”
Long-Term Resident (LTR)
You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends. In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.A=
What is a Lawful Permanent Resident
You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant.
What if I resided outside of the U.S?
Simply residing outside of the U.S. is no enough to relinquish your Green Card. Rather, you still retain your Green Card Status until you formally abandon the Green Card (actually or constructively).
You generally remain a Legal Permanent Resident if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t commenced to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country.
You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.
If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be treated as having expatriated as of that date.
Date of Termination of Long-Term Residency
If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.
– The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.
– The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).
– The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.
– If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment on a Form 8833 attached to a timely filed income tax return. See Regulations section 301.7701(b)-7 for information on other filing requirements if you are such an individual.
Date of Expatriation
Date of Tax Expatriation For purposes of filling out Part I, the date of your expatriation is the later of the date you notified the relevant agency of your expatriating act or the date Form 8854 was first filed in accordance with these instructions. Apply the rules of section 7502 to determine the date on which this form is filed. Generally, the postmark date is the filing date
Will I Be Taxed Under IRC Section 877
There are three main situations which may result in Exit Tax Liability:
You are subject to taxation under section 877 if, within the 10-year period immediately preceding 2017, you lost your U.S. citizenship or you were an LTR who ceased to be a lawful permanent resident and any one of the following applies to you:
– Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation is more than the amount listed by the IRS for the respective year:
- $139,000 for 2008
- $145,000 for 2009
- $145,000 for 2010
- $147,000 for 2011
- $151,000 for 2012
- $155,000 for 2013
- $157,000 for 2014
- $160,000 for 2015
- $161,000 for 2016
- $162,000 for 2017
Your net worth is $2 million or more on the date of your expatriation.
You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.
You can qualify for the exception described above if you meet both of the following requirements:
– You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.
– You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
You can qualify for the exception described above if you meet both of the following requirements:
– You expatriated before you were 18
– You were a resident of the United States for not more than 10 tax years before the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
Exit Taxation under Section 877A – A Summary
The following is provided in the instructions of Form 8854, but we will provide an additional summary for you to provide a bit of clarity:
How is the Tax Calculated?
If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”).
Does It Apply to All Property?
No. This applies to most types of property interests you held on the date of your expatriation. But see Exceptions, later.
Gains vs. Losses
The IRS will try to tax you on all Gain, while limiting your losses. As provided by the IRS: Gains from deemed sales are taken into account without regard to other U.S. internal revenue laws. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn’t apply.
Current Year (2017)
For 2017, the net gain that you otherwise must include in your income is reduced (but not below zero) by $699,000.
The Mark-to-Market tax does not apply to the following
- Eligible deferred compensation items.
- Ineligible deferred compensation items.
- Specified tax deferred accounts.
- Interests in nongrantor trusts.
Deferral of the Payment of Mark-to-Market Tax
You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property.
If you make this election, the following rules apply:
- You make the election on a property-by-property basis.
- The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.
- Interest is charged for the period the tax is deferred.
- The due date for the payment of the deferred tax cannot be extended beyond certain dates.
If you are considering expatriation, and you’re either a US citizen or Long-Term Permanent Resident, that it is important to understand the exit tax implications.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.