To set a common scenario: imagine that you moved to the US on assignment, it was only meant to be for a couple of years, but life has other plans; a great opportunity arises requiring you in the US for an indefinite period of time, or you meet someone that makes a longer stay in the US feel like a compelling option.
In both of these scenarios, and many others, obtaining a green card provides a level of security and in turn the ability to make longer term plans. However, holding a green card has tax consequences.
A green card holder is subject to many of the same US tax rules as a US citizen or resident. Wherever a green card holder lives in the world annual US tax filings are required and the individual may be subject to the complications that arise from having to consider their financial situation across two or more tax jurisdictions. These complexities also apply to individuals holding an expired green card.
Further, if an individual wishes to abandon their green card they may subject to ‘covered expatriate status’ if they are considered a long-term lawful permanent resident (LTR); which is an individual who has held their green card and filed as a US person for at least eight of the prior 15 tax years.
A long term lawful permanent resident will be considered a covered expatriate if they meet one or more of the three following tests:
- They have a net worth of over $2m
- Their average net income tax for the five prior years was in excess of $172,000.
- The individual is non-compliant with their Federal filing obligations
Being a covered expatriate has two main notable downsides: firstly, the so called ‘exit tax’ and secondly, a US citizen or resident will be required to pay 40% tax on any gifts or bequests from a covered expatriate.
The exit tax is a mechanism whereby the IRS collects tax on the worldwide assets of the individual; a deemed sale at fair market value is considered to have occurred on the day before the green card is abandoned and any unrealised gain relating to the assets may become subject to US tax at a rate of up to 40.8%.
The exit tax applies to both capital assets – such as stock and real property – and income assets, such as pensions and deferred compensation. Therefore, it would be prudent to obtain advice before revoking the green card to determine any exposure to the exit tax and to see whether any planning can be made to mitigate this.
To refer back to the initial scenarios, if a covered expatriate has had a child while resident in the US, or their child is otherwise a US person, the issue of how to pass on wealth as a covered expatriate becomes particularly relevant as future gifts to that individual may be subject to a 40% tax.
While there can be some clear downsides to becoming a covered expatriate, becoming a covered expatriate is not always a foregone conclusion; we would encourage individuals to seek advice prior to the eighth year of holding their green card to consider the impact of becoming a LTR or whether it would be appropriate to hand back the green card before that date.
If this anniversary has already been passed, and the individual no longer wishes to hold the green card, advice should be sought to determine the impact of revoking the green card and whether, with planning a palatable route can be found under which to give this up.
An individual may continue to earn income from US sources once they have given up residency. Generally, a 30% Federal tax withholding will occur against such income. However, if they are subject to tax in a second jurisdiction certain elections can usually be made to reduce the US tax withholding in line with the relevant tax treaty – such as the US/UK tax treaty. This often removes the requirement for ongoing US tax filings altogether.
While giving up a green card usually signals a permanent separation from life in the US, any individual who resumes residency in the US after a short period of non-residency can be drawn back into the US tax net for the intervening period; this is another signifier of why a person’s US tax and immigration status should be viewed at long-range.
With all the above said, tax planning should not happen within a vacuum, we would always recommend that in tandem with the tax advice you seek immigration advice when acquiring and giving up a green card.
