7 Tax Warnings For Green Card Holders/Permanent Residents

6 Tax Precautions Before Renouncing U.S. Citizenship or LTR

Tax Warnings For Green Card Holders/Permanent Residents

It is not uncommon for Taxpayers who may have been a U.S. person for tax purposes for many years to decide at some point in their lifetime, that they no longer want to deal with the headaches of being a U.S. Citizen or Permanent Resident of the United States. U.S. Citizens, and permanent residents who are Long-Term Lawful Permanent Residents, may become entangled in the IRS expatriation/expat matrix at the time of renouncing or relinquishment. As a result, taxpayers who do not properly plan their expatriation before either renouncing their US citizenship or filling the form I-407 (the most common method for relinquishing permanent residence), may find themselves subject to a heavy exit tax if they are deemed to be a covered expatriate. Let’s look at six quick facts taxpayers should be aware of before they give up their U.S. citizenship.

Permanent Residents Can be Subject to Exit Tax

It is pretty well known that U.S. citizens may become subject to the exit tax at the time they renounce their US citizenship. But about 20 to 25 years ago the US government expanded the category of taxpayers who can be considered subject to the covered expatriate rules to include lawful permanent residents who are considered Long-Term Lawful Permanent Residents (LTR). This generally means that the taxpayer has been a lawful permanent resident for at least eight of the past 15 years — unless certain elections have been filed, to be treated as a foreign resident have been made. It is important to note that it does not require eight full years of maintaining lawful permanent residence status.

The Pre-Expatriation Gifting Rules are Complicated

When a person decides they are going to expatriate, one of their first knee-jerk reactions is of course to consider gifting some of the money to a trusted family member in order to avoid having the net worth component of being a covered expatriate. The gifting rules are complicated, especially if the taxpayer is giving the gift in the same year that they are expatriating. Likewise, there are limitations on the ability to give gifts to non-resident spouses and avoid taxes on those gifts.

Worldwide Assets are Included for Exit Tax Purposes

For taxpayers who are considering expatriating, it is important to note that it is not limited to US assets, but rather a Taxpayer’s worldwide assets must be considered when calculating whether they are covered expatriates — and if so whether they are subject to exit tax. This can be very complicated, especially for taxpayers who have foreign pension plans and especially those with self-managed pension plans such as the SMSF in Australia.

Becoming a Covered Expatriate is Easier Than You Think

Many taxpayers presume that just because they are under the $2 million net worth test, that they do not qualify as a covered expatriate – but unfortunately, the net worth test is only one part of the analysis. If the taxpayer meets either the net worth test, the net income average tax liability test, or the five-year tax compliance requirement, they may be subject to exit tax. Thus, a person may be considered a covered expatriate even if they are below the $2 million mark.

Exit Tax Can Sneak Up on Taxpayers

While the mark-to-market gain is one of the most common ways a taxpayer may become subject to exit tax at the time of expatriation, there are many other categories of income that must be considered as well, such as ownership in a trust, specified tax-deferred accounts (such as certain IRAs), and ineligible deferred compensation plans.

8833 Tax Treaty Election Trap

Some Taxpayers consider wanting to file Form 8833 in order to elect to be treated as a foreign person for tax purposes — if they are residents in a treaty country and can qualify for the election. It is important to note that there is a tax trap when filing a Form 8833 for these purposes, and if the taxpayer is already considered a Long-Term Lawful Permanent Resident at the time that they file a treaty election, then this may be a form of expatriation. Thus, if the taxpayer is not properly prepared at the time they filed the treaty election, it may result in unforeseen tax headaches – which is why timing the 8833 election.

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 that 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.