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US TAX bLOG

US TAX GUIDE - GREEN CARD HOLDERS

TABLE OF CONTENTS:

  • Introduction
  • Green Card Holders filing US Tax return for the first time 
  • Important Things to Remember for Green Card Holders before and after arrival to the US.
  • What are Exit taxes?
  • Conclusion

Introduction

US Tax Green Card Holders
Green Card Holders need to go through a lot of Tax Forms
                                             

Congratulations!! You’ve got your Green Card. Over half a million people receive their Green cards every year. Along with that comes the complex web of US taxes. Although there are various flavors of Green cards, the Tax implications are the same. Like all US Citizens,  you are supposed to pay taxes on your worldwide income. Let us go through the US Tax Guide for Green card holders below.

You will be considered as a “US Tax Person” upon receiving your Green card and must file your Tax return every year after receiving it. The Green card test as per the IRS states that, if you are a lawful permanent resident at any time during the calendar year, you are a Tax resident for federal taxes.

You will continue to maintain US Tax Residency Status unless :

  • State in writing to the USCIS, you want to renounce and abandon its status.

  • The USCIS terminates your immigration status.

  • US Federal court terminates your immigration status.If you meet the Green Card test at any time during the calendar year but do not meet the Substantial Presence Test (SPT) for that year, your residency starting date would be the 1st day on which you are present in the United States as a lawful permanent resident. However, if you do meet the SPT along with the Green Card test, whichever day is earlier, will be considered as the day you begin your US residency.

If you are abroad and receive your Green Card, your tax residency will start on the 1st day when you land in the US that year. Example: Your GC was issued on June 15th, 2021 and you came to the US on 1st October 2021. US Tax residency will start from 1st October. If you came on 10th January of 2022 to the US, your Tax residency will start from 1st January of the following tax year, irrespective of when you come in the following year.

Green Card Holders filing US Tax return for the First time 

 
Filing a US Tax return for the 1st time can be very challenging as various scenarios need to be considered based on the arrival date of the taxpayer. If the taxpayer has a lot of foreign income for the year and arrives in the second half of the year, a dual-status return (part-year) may make a lot of sense. The only drawback is that single or married filing separately filing positions needs to be taken. 
 
The MFS doesn’t have the most favorable deductions/tax credits and tax rates. If the taxpayer is married and takes the election 6013(G) or 6013 (H), can file a full-year tax return, file a JOINT return with the spouse, and get the benefit of the standard deduction. (Standard Deduction for 2021 is $25,100 for an MFJ return). On the contrary, a dual-status return can only claim the itemized deduction. However, filing for a full-year resident tax return will tax the taxpayer’s worldwide income from January 1st of the calendar year. So, if the taxpayer is coming to the US early in the year, it makes more sense to go with a full-year return. Tax planning is highly recommended by a Tax professional before moving to the United States. Any questions, please feel free to get in touch with us.
 

Important Things to Remember for Green Card Holders before and after Arrival in the US.

 

       ●   Shares/Stocks: If you own a lot of shares, long and short term, if you sell them after you became a US Tax Resident/Green Card Holder,  you will be subject to taxes on the gains, even if they are exempt in your home country.   Foreign rental property: Reporting of US rental property is very straight forward, however after the tax updates of 2017, Foreign Property will be classified as a QBU (Qualified Business Unit), Form 8858 will need to be prepared, which is complicated and a tedious exercise.

  • Foreign Pensions/Life Insurance/Mutual Funds: One piece of advice would be to sell your Foreign mutual funds, close your Life insurance, and withdraw your foreign pensions before coming to the US permanently. Else, it may fall under the reporting of PFIC (Passive Foreign Investment Company) Form 8621. Taxes can go high as 50% on these items, reporting is complicated even for a seasonal Tax preparer and out of reach for a newbie to the US Tax system.

  • The major share in Foreign Corporation: A US person owning a major stake in a non-US Corporation will have to file Form 5471. You will be subject to the GILTI Tax (Yup Guilty!). Whether income is distributed or not taxes need to be paid on the foreign income, deferring isn’t an option anymore.

  • Foreign Financial Interests and Foreign Assets (FinCen 114 & FATCA Form 8938): If you Foreign Bank Account or Financial Interest, or if you have a signature authority that exceeds more than $10,000 at any time after you become a US Tax Person, Form FinCen114 needs to be filed with the department of treasury. In addition to this, FATCA form 8938 needs to be completed for reporting of Foreign assets if they are exceeding the threshold limits for the year.

  • Foreign Tax Credits: If you are filing a full Year tax return and pay taxes in your home country, you may claim a credit for the taxes paid on Form 1116.

  • Foreign Earned Income Exclusion (FEIE): As a Green Card holder you can also claim FEIE if you maintained a Tax home abroad and had a physical presence abroad (PPT)for at least 330 days in a 365 day period in the current tax year. Claiming FEIE by the BFR (Bonafide residency test) isn’t recommended for Green card Holders as it conflicts with residency (You can’t be a resident of two places at the same time). Green Card itself is a residency-based card. Hence, it’s very important to understand the US Tax Guide for Green Card Holders before leaving the US.

Surrendering your Green Card to the USCIS

If you had enough of the American life and decided to move to a Tax-haven in the Middle-East or Europe, where your foreign earned dollars would go the extra mile, you can surrender your Green Card by writing to the USCIS that you intend to renounce your Green Card. Merely leaving the country isn’t enough and your Tax obligation would not end with it.

As a Green Card Holder, you have the same filing and reporting requirements as a US Citizen. Along with that comes the “Exit Tax” or Expatriation Tax. The US government’s last parting shot at you before your leave as a Green Card Holder or a US citizen renouncing citizenship. Consider this as the final tax bill from Uncle Sam.

What are Exit Taxes?

 

You will be a long-term resident, if you are a lawful permanent resident (Green card holder) in the US for at least 8 out of the 15 year period before the residency ends, you will have to file Form 8854 along with your Final Tax Return. The amount of exit tax you will pay will depend on whether you are a “Covered Expatriate”.

The three conditions which can trigger you to pay the dreadful exit taxes are:

  • Is your Net worth over $2 million (total worldwide assets, joint its $4 million)?

  • Your average annual net income tax for the past 5 years was $168,000 (for 2019). The average annual net income tax is (Tax on the taxable income plus alternative minimum tax minus all your Tax Credits). (For older forms, before 2018 – Take line 44, plus line 45 and subtract (everything between line 47- line 53), your line 55 will be your net tax liability. Use this same concept for the Tax years 2018 onwards.

● If you fail to certify on Form 8854, that you have been Tax compliant for the past 5 years before the date of your exit out of the US.

How much Exit Tax do you owe to the United States?

The Exit Tax will depend on the unrealized capital gains, forms of your other personal assets. Your employment income would not be taxed again. The way exit tax works are that it assumes you sold all your assets on the exit date at fair market value, again. The net capital gains can be taxed at a maximum rate of 23.8% ( 20% capital gain tax plus 3.8% net investment income tax). Thankfully, this gain has a threshold limit.

If the gain is lesser than $737,000 for 2020, it’s not subject to any taxes. This limit applies to each taxpayer, so it’s $1,474,000 combined!. Taxes on 401k plans can be deferred but may be taxed at 30% later, once the taxpayer withdraws.

It’s always better to file your tax returns and complete form 8854 in the year of departure and not become a covered expatriate even if you have no gains to report. Nothing is better than a clean heads-up from the US tax system at the time of exit. Tax planning years in advance does help the exit process. Even though you may have surrendered your Green card with the immigration, your Tax obligation isn’t completed until you complete form 8854 along with the annual tax return for that year. If you fail to file this form, you will still have to keep filing taxes in the US and pay taxes on your worldwide income. Worst, the IRS may still ask you to pay a penalty of $10,000 for failure to file form 8854.

Conclusion:

As you can see from this article, the US Tax Guide for Green Card Holders, the year of arrival and departure for a Green Card holder can be very complex and someone who isn’t familiar with the intricacies of the US tax system can end up paying the big price. If still in doubt, please schedule a call with us.

DISCLAIMER: The above info should only be considered for the knowledge of US Tax. Every taxpayer’s situation is unique, strongly advise you to consult a tax professional.