Does Getting a Foreign Passport & Living Abroad Impact U.S. Tax?

Getting a Foreign Passport, Leaving the US & Tax Consequences

Foreign Passport, Leaving the US & Tax Consequences

Foreign Passport and Exit Tax Consequences when Leaving the US: With the current state of affairs in the United States, it is no wonder that many U.S. Citizens and Legal Permanent Residents (aka U.S. persons) are considering permanently leaving the United States — or at least leaving for a good while. And since the once almighty U.S. passport has lost its luster, many taxpayers are considering obtaining a second passport to travel globally during these uncertain times. 

But, just obtaining a second passport does not impact how the US person is taxed by the US government , even if the person resides abroad.

It is important to note that the United States is one of the only countries in the world that taxes individuals on their worldwide income, and requires the annual disclosure of foreign accounts and assets.

If a person is considered a US Citizen or Green Card Holder and they are traveling abroad on a foreign passport, they are still subject to IRS tax rules until they formally expatriate. In addition, at the time of expatriation and even thereafter, the expatriate may have a continuing tax requirement and/or an exit tax payment due, depending on the specifics of their situation.

Let’s looks at seven (7) important tips about getting a second passport and the potential US tax ramifications for US citizens and green card holders.

US Taxation on Worldwide Income

When a person is a US Citizen or Legal Permanent Resident of the United States, they are subject to US tax on their worldwide income.

This is also true of foreign Nationals who meet the substantial presence test.

Until a person formally relinquishes their green card or renounces their US citizenship, they will continue to be taxed on their worldwide income.

*Just letting a green card lapse is not an expatriating event.

Getting a Second Passport is not an Expatriating Act

Let’s say you have a US passport but decide you want to travel around Europe and escape the US during these tumultuous times, so you obtain a second passport.

While this second passport may take the place of your US passport for your overseas travel — and even if you let your US passport lapse — you are still considered a US person.

U.S. Citizens Must Formally Expatriate

If you are a US citizen, then you will have to formally expatriate in order to avoid being taxed on your worldwide income (including FBAR & FATCA reporting your global assets annually to the IRS if you meet the threshold requirement).

Typically, this is done by visiting a foreign/embassy consulate, preparing the necessary Department of State forms — such as form DS-4079 —and completing the exit interview.

Even if you obtained a second passport and are traveling outside of the US on that second passport, you are still subject to worldwide income and US tax requirements.

Green Card Holders/Permanent Residents

For green card holders, the task is relinquishing U.S. status is a bit simpler.

The individual can simply file a USCIS Form I-407 and call it a day with the U.S. (this does not necessarily extinguish any tax issues, but rather just the status issue).

Previously, filers could walk the form into the foreign embassy — but these days the form is submitted by mail (although some consulates abroad may still accept the form in-person).

Just Let my Green Card Lapse?

While letting the green card lapse, and/or residing outside of the United States for more than 6-months may (technically) invalidate the green card, it does not invalidate the person’s US tax status.

Therefore, if you obtain a second passport, live and reside outside of the United States, and do not formally relinquish your status  — you are still subject to US tax on your worldwide income.

Expatriating Act vs. New Passport or Citizenship

When a US person obtains a new passport or dual citizenship, they are still required to complete the expatriating act in order to relinquish their US status.

Oftentimes, we are contacted by individuals who never re-upped their green card and have been living carefree outside of the US tax system for many years — only to learn by happenstance but they are still considered a US person for tax purposes.

This is especially important for green card holders who may have believed if they left the US before eight years they would avoid long term resident status and potential covered expatriate/exit tax ramifications.

Covered Expatriate & Exit Tax

Certain US citizens and legal permanent residents might subject to additional tax at expatriation.

For US citizens and long-term residents, they must determine whether they meet one of the three (3) tests to become a covered expatriate, and if so whether they have sufficient mark-to-market unrealized capital gain or deemed distributions that result in an exit tax.

Plan Before Exiting the U.S.

Once a person exits the US tax system by completing the expatriating act, they cannot go back and unwind it.

Since there is generally no look-back for expatriation, and especially if only one spouse is leaving the US, proper exit tax planning may minimize or eliminate any potential exit tax.

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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.

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