Giving Up Your Green Card? The IRS May Have a Surprise for You
As a Green Card (GC) holder, you have the same tax filing requirements as US citizens. If you choose to give up on the American dream and surrender your Green Card, depending on how long you held your Green Card, there may be additional reporting requirements. Importantly, until those requirements are settled, you will remain a US person for tax purposes, even if you proceed with the actual surrender process with immigration.
If you do meet these additional reporting requirements (more below), there may also be an “Exit Tax”.
How long did you have your GC?
If you give up your Green Card, it is important to know how long you have had the Green Card. There are two terms that must be understood:
- Lawful Permanent Resident” - The day you received your GC, you became a lawful permanent resident
- Long Term Resident - If you held your green card for 8 or more years, then you are considered a long term resident, and are required to file form 8854.
What is form 8854? How do I know if I need to file it?
As a Long term Resident, in the year after you renounce your green card, you must file your final tax return, along with form 8854. This form requires you to certify the last 5 years of your tax returns have been filed, along with the tax due for those years. Note - if required to file this form, until you file it, you will remain a US person for tax purposes. Ie - you lose the benefits of being a GC holder but still must file a tax return and pay tax - not a good deal for anyone.
Final Tax Return? Please clarify.
Let’s say you gave up your green card on October 15, 2016. In 2017, you will have to file a tax return for the 2016 tax year.
If you were giving up your citizenship, you would be required to file a dual status tax return
- Dual status return = Simultaneously file form 1040 and form 1040NR in the same year.
- In this example, as a US citizen, you would file form 1040 declaring your worldwide income from Jan 1, 2016 until the date of renunciation (Oct 15, 2016), and a non-resident tax return, declaring only your US sourced income for Oct 16, 2016 – Dec 31, 2016.
When giving up your green card, as opposed to renouncing your citizenship, there is an additional option; you can file a dual status return OR you can choose to be treated as a US person for the entire tax year (Jan 1 – Dec 31) and file one Form 1040 declaring your worldwide income for the entire year (even though you gave up your citizenship on Oct 15).
Depending on your scenario, this can have tax optimization benefits. Your tax advisor should advise you on what is the most appropriate option for you.
In the above scenario, as a GC holder, You have the right to choose to file a full year tax return (Form 1040),
Will I have to pay an Exit Tax?
That depends. Most importantly, we need to determine if you are a ‘covered expatriate’.
If you are deemed as ‘covered expatriate’ then it is necessary to pay an exit tax. The tax calculation assumes that you hypothetically sell all of your assets on the date before you gave up your GC (it’s the same methodology if you renounce your citizenship) and your tax rate can be up to 23.8%. This number results from the capital gains rate of 20% plus the Net Investment tax of 3.8%
- Note - there is a reduction (per person) in the taxable gain of $693k for 2016. For example, if you had 2 million of net assets, and had a 23.8% tax, that nets you a 476k tax hit. You can reduce the first 693k of gains (for 2016), so there would be no tax to pay.
- Only at 2.9 million does the exit tax begin to take effect ($2.9 million * .238 = 690k
Two of the three determinants of if you are a covered expatriate are related to net worth, the third is related to compliance.
Net worth - $2 million
The first trigger is a net worth of more than USD 2 million, taking into account all of your worldwide assets.
Note - even if you are married, your net worth considered separately. Ie - if you and your spouse own all assets jointly, the limit is then $4million.
Income tax liability - $161k
Even if your net worth is below $2 million, you may be a covered expatriate if your average tax liability during the previous five years exceeds $161k annually (for 2016). Advanced planning may benefit you if you are on the precipice.
- For example - if you had income tax liability of $200k for the past 4 years, you may be better off not working at all in the year before you expatriate.
- 161k * 5 years = 805k of tax liability over 5 years. 4* 200 = 800k; take the year off and travel, you may wind up saving money by avoiding the exit tax.
Note - the amount of ‘tax liability’ is pulled directly from your tax return. In anticipation of expatriating, it may make sense to file separately to reduce your average individual tax liability for form 8854 calculations.
|
Year |
Average Net Income Tax Liability for 5 years before date of expatriation |
|
2008 |
139k |
|
2009 |
145k |
|
2010 |
145k |
|
2011 |
147k |
|
2012 |
151k |
|
2013 |
155k |
|
2014 |
157k |
|
2015 |
160k |
|
2016 |
161k |
Failure to comply with US tax obligations.
This is the easy one. If you fail to file tax returns, or if you fail to file form 8854 at all, you may automatically become a covered expatriate, and required to pay exit tax. If you have renounced your GC in a prior year, but failed to file form 8854, there are creative solutions to not subject you to becoming a covered expatriate. Please contact us so that we can analyze your situation and find an action plan for you.