U.S. Tax Laws For Permanent Residents & Green Card Holders

U.S. Tax Implications For Permanent Residents & Green Cards

Tax Considerations For U.S. Permanent Residents/Green Card Holders

While becoming a US Permanent Resident/Green Card Holder can have significant immigration benefits, it is important to also consider the U.S. tax implications associated with becoming a permanent resident as well. That is because as a permanent resident, a taxpayer is taxed on their worldwide income. While some taxpayers may consider making a treaty election if they qualify, it may conflict with their permanent resident status due to the number of days they are required to reside in the United States. In addition, taxpayers who become Permanent Resident/Green Card Holders may become subject to an exit tax — depending on whether they meet one of the tests of being a covered expatriate. Let’s look at six important tax considerations for foreign nationals who are considering becoming a permanent resident/green card holder of the United States.

Worldwide Income

The first thing to keep in mind is that any taxpayer who is considered a U.S. Citizen, Lawful Permanent Resident, or foreign national who meets the Substantial Presence Test, they are subject to US tax on their worldwide income. Therefore, for taxpayers who may be considered green card holders and have a significant amount of income from overseas, that income is still taxable in the United States, even if it is not taxable abroad.

Treaty Elections May be Limited

Some green card holders who live overseas and reside in a treaty country may be able to make a treaty election to be treated as a non-us person for tax purposes. This would mean that the taxpayers are only taxed on their US-sourced income and not their worldwide income. It is important to note, that making a treaty election can cause other issues, especially when it comes to applying for or maintaining a green card in addition to the fact that in general treaty elections to be treated as a foreign person tend to have a high audit risk.

Limited Number of Reentry Permits

For taxpayers who have a green card but plan on living overseas, they may be able to apply for a reentry permit, which allows them to live overseas without meeting the residence requirement for green card holders to maintain their green card. The reentry permit can only be renewed a limited number of times, so taxpayers should be cognizant of how long they intend to maintain the green card and whether or not they plan on renewing it.

Non-Taxable Foreign Income Becomes Taxable

One problem with being a green card holder and earning income from foreign sources that are not taxable in the foreign country is that there are no foreign tax credits to offset the income in the United States. Take for example a permanent resident who receives distributions from an Australian superannuation but resides in the United States. In this type of situation, typically the treaty election is not available and there are no foreign tax credits to offset the income for the US tax return — and so otherwise tax-free distribution of superannuation will become taxable under U.S. tax law (while the superannuation is taxed at 15%, it is taxed within the Super and taxes are not being paid by the actual recipient of the distribution and thus the foreign tax credits are not available to offset the taxes within the superannuation itself).

Formal Relinquishment vs Visa Status

If a person only maintains a visa instead of becoming a permanent resident and they no longer want to be a US person for tax purposes they can avoid being taxed as a US person by simply not meeting the substantial presence test. This becomes very beneficial for taxpayers who may be receiving a significant amount of income during the tax year from abroad and do not want to be taxed as a US person for that year. Regarding relinquishing a green card, there are more formalities to the process. Likewise, just letting the Green Card expire is insufficient to terminate their ‘U.S. Person’ status, and depending on how long the person is a green card holder for, they may become subject to an exit tax.

Exit Tax

Once upon a time, the exit tax was only for U.S. Citizens who were going to renounce their US citizenship. This category was expanded to include Long Term Lawful Permanent Residents. Green card holders who are considered long-term lawful permanent residents may also become subject to an exit tax, even though they are not citizens. If the taxpayer is then considered a covered expatriate, they may become subject to a significant exit tax depending on a cross-section of their assets and income. When calculating exit tax, it includes both US and foreign income and assets.

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. 

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.