7 Important U.S. Tax Implications of Having a Green Card

7 Important U.S. Tax Implications of Having a Green Card

The U.S. Tax Implications of Having a Green Card

A green card is used to reflect the Lawful Permanent Resident status of a foreign individual. Some people obtain a green card because they ultimately intend to become U.S. citizens through naturalization. Other individuals may obtain the green card because they were previously on a visa such as an H-1B or L-1 visa and intend on remaining in the United States for a significant amount of time — and they are concerned that their visa may expire. Alternatively, a taxpayer who is a foreign national may marry a U.S. citizen and almost automatically be qualified for a conditional green card — which can then lead to U.S. citizenship if the taxpayer chooses to do so. One important component of having a green card is that there are various U.S. tax and reporting implications that the taxpayer may not be aware of when they obtain the green card (or what steps they must follow to give up their U.S. Person status). Moreover, simply terminating green card status does not mean the taxpayer is then no longer subject to any U.S. tax; rather, it will depend on whether the taxpayer is considered a long-term lawful permanent resident and/or whether they have made any treaty elections or are otherwise tax compliant before terminating the green card. If the taxpayer is considered a covered expatriate, they may have a significant exit tax at the time they terminate the green card as well as future taxes (primarily) on various gifts and requests to U.S. persons. Let’s walk through seven important U.S. tax implications for foreigners who obtain a green card.

Worldwide Income Requirement

First, one of the most important issues that taxpayers who obtain green cards should be aware of, is that they are taxed on their worldwide income. In other words, even if the taxpayer is a green card holder (not a U.S. citizen) and earned all of their money from foreign sources and even if they pay some taxes in foreign countries, they are still required to include the income on their US tax return and they may still have a U.S. tax liability. Even though taxpayers are taxed on their worldwide income, they may be able to reduce or eliminate the tax if they qualify for foreign tax credits or the foreign earned income exclusion.

Worldwide Reporting

In addition to having to report their worldwide income, taxpayers who have green cards are also required to report their global assets. The IRS has various international information reporting forms that a taxpayer may have to file depending on the value of their foreign accounts, assets, and investments as well as the category of investment. In other words, some forms require a higher threshold for certain foreign assets, while other forms require a lower threshold for the reporting of other foreign types of assets or accounts.

Potential Treaty Election and Tripwires

If the taxpayer receives a green card and lives in a treaty country, then they may be able to make a treaty election to be treated as a foreign person for tax purposes instead of a US person. This would mean that the taxpayer would only file a Form 1040-NR with a Form 8833 treaty election and not a Form 1040 to report their worldwide income. Instead, they are only taxed by the U.S. government on their U.S.-sourced income, presuming that they have any U.S.-sourced income. When taxpayers make a treaty election, they have to make the treaty election each year and treaty elections tend to be a red flag for the IRS.

FBAR Holdover Requirement

When the taxpayer makes a treaty election, then they are not required to report their worldwide income and most of the international information reporting forms may not be required to be filed either. When it comes to the FBAR, the IRS takes the position that even if the taxpayer makes a treaty election, they are still required to report the FBAR each year even if they’re not considered a U.S. person for tax purposes because they made the election. Conversely, there is a recent case making its way through the district court in California (Aroeste) in which the court stated that taxpayers who qualify to be treated as foreign persons under a treaty election may be able to avoid having to file the FBAR.

Income that is Tax Exempt Abroad

Because the United States taxes green card holders on their worldwide income, it is important to keep in mind that even if certain income is exempt or tax-free overseas, it does not mean it will maintain that status on a U.S. tax return. For example, in many Asian countries, passive income such as dividends and capital gains may not be taxable, but for US tax purposes that income is generally taxable unless there is a rule, exception, or exclusion that eliminates it from US tax liability.

No Tax Return, Still Report Assets (B1/B2 Tourist Example)

For taxpayers who may have significant foreign assets, it is important to note that they may have to disclose this information to the U.S. government even if they are not required to file a tax return. For example, if a person is on a tourist visa B1/B2 and does not earn any U.S. (or foreign) income but meets the substantial presence then they are required to file the international information reporting forms just as if they were filing a tax return, such as Form 5471, Form 3520, and Form 8865. Unfortunately, the failure to file these forms may result in significant fines and penalties — although there are various programs a taxpayer may qualify for to reduce or eliminate those fines.

Terminating Green Card Status and Exit Taxes

One final issue that taxpayers who have a green card should keep in mind, is that once they give up their green card and depending on how long they had the green card, whether they filed any treaty elections during the time they had the green card, and what their overall net worth or net income tax liability they may be subject to a U.S. exit tax implication. The exit tax does not apply to all green card holders and only those who are considered long-term residents. One more important fact to keep in mind is simply letting the green card expire is not the same as giving up the green card so if the taxpayer does not actually terminate the green card status, they are still considered a U.S. person for tax purposes unless ultimately may lead to an exit tax which could have been avoided had the taxpayer properly given up their permanent residency status.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.