Legal Permanent Residents/Green Card Holder Tax Guide (2018 Update)
At Golding and Golding, our managing partner is one of less than 400 Tax Attorneys (out of 200,000 practicing attorneys in California) who is a Board-Certified Tax Law Specialist.
Common questions receive from Green Card Holders regarding US Tax
- What income do I have to pay U.S. tax on?
- What if I already paid taxes in a foreign country?
- I had my foreign accounts before I became a U.S. Person?
- I have never transferred the money to the United States?
- What do I do about my foreign business?
- What if I have foreign investment income?
- What if I only have Passive income generated from abroad?
- 1 US Tax of Legal Permanent Residents
- 2 Basic Definitions
- 3 Green Card Tax Example – Meet Thomas
- 4 Tom Moves to the United States
- 5 First Mistake: Tom is a Non-Resident for U.S. Tax
- 6 Second Mistake: Tom Does Not Pay Tax on his Foreign Income
- 7 Does Tom Report his Foreign Accounts?
- 8 Back To Tom and His Tax Filings
- 9 Is Tom Going to Jail for Life and Face Deportation?
- 10 IRS Foreign Money Penalties
- 11 Not Everyone Gets Penalized
- 12 You Have Methods for Getting IRS Compliant
- 13 Golding & Golding: About Our International Tax Law Firm
US Tax of Legal Permanent Residents
We practice exclusively in the area of international tax.
We have spoken with thousands of Legal Permanent Residents/Green Card Holders during our many years of representation, and realize that there are many common misunderstandings amongst Legal Permanent Residents/Green Card Holders as to what their tax and reporting requirements and liabilities may be.
Especially with the recent introduction of FATCA (Foreign Account Tax Compliance Act), and renewed interest in FBAR (Report of Foreign Bank and Financial Account), U.S. Tax rules have become much more complex.Since this is a very complex area of tax, especially for individuals who may have no tax background at all, we think using an example may help.
U.S. Income Tax
U.S. income tax refers to any tax the person would have to pay to the U.S. government on income that was generated either in the United States, or outside of the United States.
Active income refers to income that is earned from sources such as employment, consulting, or independent contractor work.
Passive income is income that is generated from non-active means, such as interest, dividends, capital gain, royalties, rental income, and other passive means.
FBAR (FinCEN 114)
FBAR is the Report of Foreign Bank and Financial Account form (aka FincEN 114). Whether or not a person has to file a US tax return (because they earn less than the threshold amount required to file a tax return), a Green Card Holder still has to file an FBAR in any year that he or she has an annual aggregate total of more than $10,000 in foreign accounts.
FATCA (Form 8938)
FATCA is the Foreign Account Tax Compliance Act. It is similar to the FBAR, but requires much more information to be disclosed. Unlike the FBAR, Form 8938 is filed alongside your tax return. There are various threshold requirements to determine whether you may or may not have to file the form, but if you do not meet the threshold requirements for having to file a tax return, you do not have to file a separate form 8938 (whereas you may still have to file the FBAR)
Green Card Tax Example – Meet Thomas
Tom is originally from Australia. Before coming to the United States, Tom lived in Taiwan, Hong Kong and United Kingdom. Tom came to the United States in 2014 when he married a U.S. spouse.
Prior to coming to the United States Tom had earned some significant income, and therefore was not necessarily reliant on earning U.S. income — at least immediately upon arriving in United States.
Tom has the following money (links to Golding & Golding Free Resources):
- Bank Accounts
- A Stock Trading Account
- Mutual Funds
- Rental properties
- UK Pension
Tom Moves to the United States
In September, 2014, Tom arrived in the United States. While Tom did not speak with any tax professionals, he did join an Expat group in the United States and was able to pick up just enough information get himself into a bit of a pickle.
First Mistake: Tom is a Non-Resident for U.S. Tax
The first tidbit of misinformation Tom received was that he is not subject to U.S. Tax during his first year in the United States, unless it is U.S. sourced income.
Why? Because Tom did not meet this Substantial Presence Test in 2014 because Tom was in United States for less than 183 days and was not in the United States at all during the two prior years (he met his future wife while she was on vacation in Australia)
This is False
Once a person is considered a Green Card Holder, the Substantial Presence Test does not apply. The Substantial Presence Test is used for non-US citizens and non-Green Card Holders.
Since Tom arrived in United States, already with Green Card in hand, Tom would be filing a US tax return starting from when he first received a Green Card (whether or not he was residing in United States or not)
*There are some additional rules regarding filing dual returns, etc. during the first year another complexities beyond the scope of this example. All Tom really needs to know at this point is that he is considered a US person at the time he received a Green Card.
Second Mistake: Tom Does Not Pay Tax on his Foreign Income
This is also incorrect. The United States is one of only two countries the practices worldwide income taxation. In other words, the United States taxes individuals on their worldwide income. Since Tom is a Green Card Holder, Tom is subject to Tax on his Worldwide Income.
Common questions we receive on this topic include:
I Earned the Money Before I Came to the United States
From the US tax perspective, this is a nonissue. That is because even though the basis or foundation of the money was earned prior to coming to United States, the current income being generated is being generated while you are U.S. person and therefore the income is taxable in the U.S.
The Money is Tax-Free Abroad
In many countries, there are various types of savings accounts and investments which grow tax-free in that jurisdiction. Unfortunately, unless that particular type of income/account/investment is identified in a U.S. Tax Treaty (or otherwise) as being tax-exempt in the US , the income is going to be taxable on a US tax return — even if it is tax free abroad.
I Already Paid Foreign Tax on the Income
If you already paid foreign tax on income abroad, you may qualify to use a Foreign Tax Credit to offset any taxes that would otherwise be due in United States on the same income.
It is important to note that is an equation that is used to determine the full applicability of the foreign tax credit, and it is not always a dollar-for-dollar credit (the idea behind the equation is to ensure that none of the foreign taxes paid are being used to offset US source income tax due on US income)
The Overseas Money was Never Withdrawn
The United States is not taxing you on the withdrawal of the money (save for certain retirement accounts). Rather, the US tax is on the income being generated.
Therefore, if the income is being generated abroad (even if it was not distributed) it is still usually subject to tax.
Does Tom Report his Foreign Accounts?
Tom also received some misinformation regarding his foreign accounts.
He was told that since the accounts were opened before coming to the United States, he did not have to report these accounts to the IRS or FinCEN.
Again, this is incorrect but it should be noted but this is a very common issue we deal with from our clients who are green card holders.
Common questions we received on this issue include:
I opened the Account Before Coming to the U.S.
Common sense would dictate if you open an account before coming to the United States, and before you were U.S. person — with money you receive before you were U.S. person — you would not need to report this money to the IRS.
You will find over your lifetime the IRS does not necessarily act in accordance with common sense. In fact, the best way to think about it, is imagine what the commonsense response should be…and then determine the exact inverse – and that is how the IRS operates.
When you are reporting your foreign accounts, you are providing the US government with a snapshot of what you have for that reporting year.
It is not an account history and therefore the IRS does not care about how you receive the money, when you received the money, or if you were a U.S. person when you received the money.
The Money was a Gift
This is a nonissue. Remember, you are not reporting the sources of money or how you received it. Rather, you are reporting what the annual aggregate total maximum values are during the year, broken down by account
The Account was Only Opened For A Short Period of Time
This is also a non-issue. It is important to keep in mind that the IRS does not care why the account was open (to receive money before transferring it out of the account) or for how long it was opened (if is less than week).
If the account was open during the compliance period, and even if the account was dormant or inactive, it should still be recorded on an annual reporting statement FBAR/FATCA.
Additional Common Questions
Back To Tom and His Tax Filings
Since Tom received some bad information regarding what needs to be filed, Tom did not prepare his tax returns properly. Tom used TurboTax, but since he did not have any U.S. sourced income during his first few years in United States, he did not report any of his foreign income.
In addition, because Tom believed that the accounts were not subject to reporting (as they were opened before becoming a Green Card Holder aka before coming a US person), he did not file a Form 8938 or FBAR.
Finally, Tom also has interest in three businesses overseas, primarily real estate rental businesses he shares with his brother and sister in Australia.
The businesses are PVT LTD and therefore Tom may have to report the businesses on a form 5471 or 8938, along with possibly reporting the income (CFC and Subpart F rules apply)
Is Tom Going to Jail for Life and Face Deportation?
No. And please, this is where have to do your best to not allow fear-mongers or scare-mongers play on your weakness. They know you are in a vulnerable state and will try to scare you into believing that this is anything more than a mere basic compliance issue.
You will undoubtedly research the research the information on Google, and you will undoubtedly contact some attorneys who offer free initial telephone conversations.
The goal of these conversations is to sell you, by scaring you.
In this particular situation, Tom should have no problem getting himself into compliance safely with minimal penalties if not possibly having the penalties waived.
IRS Foreign Money Penalties
Depending on facts facts and circumstances of the noncompliance the IRS has the right to issue extremely lopsided penalties against any individual who is out of IRS compliance.
Even a cursory review of the IRS penalties and the Standard of Proof required by the IRS to prove the penalties reflects that even minor infractions can result in significant penalties.
Not Everyone Gets Penalized
We understand that as you research issues online, many attorneys and CPAs seem to enjoy the fear mongering aspect of being tax professionals – we do not.
They toss around terms like “five years in prison,” “$500,000 Fine”, or “Tax Fraud” to scare you. They do this, without providing examples of the penalties and without placing these penalties into context.
For example, if an individual was clearly non-willful, they are not going to jail for five years or being penalized millions of dollars for tax evasion.
Still, some attorneys go out of their way to unnecessarily scare individuals with relatively benign facts with jail or prison, but of course neglect the fact that the U.S. Government still must prove a person acted beyond a reasonable doubt to pursue criminal charges.
You Have Methods for Getting IRS Compliant
In reality, the IRS doesn’t issue penalties against every individual with undisclosed or unreported foreign money. In addition, the IRS offers various amnesty program to facilitate compliance.
In addition, depending on your facts and circumstances you may qualify for various alternatives to amnesty, which may result in a complete penalty waiver.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in IRS Voluntary Disclosure?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in IRS Offshore and Voluntary Disclosure. Contact our firm today for assistance with getting compliant.