7 Common ‘Giving Up Your Green Card’ Tax Filing Errors

Tax Filing Errors when Giving up a Green Card

Tax Filing Errors when Giving up a Green Card

When a US Person wants to give up their green card and no longer be considered a US Person for tax purposes, the process can sometimes become much more complicated than it would appear. That is because while obtaining a green card primarily impacts U.S. immigration laws when it is time to give up the green card, there are both potential tax and immigration issues to deal with. This is especially true in situations in which the taxpayer is:

• • • Deemed a Long-Term Resident

    • Covered Expatriate

    • Must Calculate the Exit Tax

There are many twists and turns for Taxpayers to be aware of at the time that they give up their green card, but let’s take a look at some of the common and avoidable tax filing mistakes.

Long-Term Resident or Not?

It used to be that the exit tax only applied to U.S. citizens, but that rule was amended to include certain Lawful Permanent Residents – but it does not include all lawful permanent residents. Rather, it only applies when a Lawful Permanent Resident is considered a Long-Term Lawful Permanent Resident that they may become subject to the exit tax at expatriation.

Covered Expatriate (Three Landmines)

When people think of the term covered expatriate they often focus on the net worth test, but that is only one of the three tests. There is also a test for net average income tax liability as well as having to show five years of tax compliance. If the taxpayer falls into any one of these three categories, they are considered a covered expatriate — unless an exception applies.

Exit Taxes are More than Just Mark-to-Market Assets

The exit tax is more than just calculating mark-to-market gain. In fact, there are several different categories of exit tax, but it is also important to note that the exit tax only applies to Taxpayers who are considered covered expatriates. The main categories for exit tax include unrealized gains, specified tax deferred accounts, and eligible/ineligible deferred compensation.

Exclusion Amount Applies only to MTM

Taxpayers who have a mark-to-market gain may be able to avoid any tax implication on this phantom gain by applying the exclusion amount. Noting, the exclusion amount only applies to the mark-to-market gain and is not applied to other potential exit tax categories such as specified tax deferred accounts or deferred compensation.

Specified Tax Deferred vs MTM

Sometimes, the categories of income may seem to overlap and so Taxpayers should be careful to carefully evaluate each specific type of asset that they include in the mark-to-market gain computation. For example, a stock that a person owns that has increased in value is typically marked to market gain, whereas a traditional (non-employment) IRA would be considered a specified tax deferred account.

Step-up For Ineligible Deferred Compensation

Especially for taxpayers who are considered Long Term Lawful Permanent Residents and may have amassed a substantial foreign pension(s), they may have a significant exit tax to pay at expatriation. LTRs should also assess the value of their foreign pension to ascertain whether or not they can apply a ‘step-up’ to reduce the taxable portion of the ineligible deferred compensation, to only include the value that increased once they became a US person and not the value that was accrued before they were a US person.

30-Day Notice (Usually) to Plan Administrators

For eligible deferred compensation plans such as 401K, Taxpayers should be sure to update their plan administrator within 30 days of expatriation so that the eligible deferred compensation does not become taxable at exit. If the taxpayer is already receiving distributions of eligible deferred compensation the 30 days might become shorter so Taxpayers should ascertain when their next distribution comes due.

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