Contributed by Dale Walters, CPA, PFS, CFP Lawful permanent residents (green card holders) are required to report and pay tax on their worldwide income, regardless of where they reside. To remove yourself from the U.S. tax system, you must give up your permanent resident status and become a nonresident alien.
An expatriation tax applies to “long-term residents” who have ended their residency. A long-term resident is defined as someone that has been a green card holder for at least 8 of the last 15 years prior to expatriation. If you have held a visa (TN, H1B, E2, etc.) for more than 8 years, this rule does not apply to you.
As a long-term resident, you will terminate your residency on the earliest of the following dates:
- The date you voluntarily abandoned your lawful permanent resident status by filing the Department of Homeland Security Form I-407 with a U.S. consular or immigration officer, and Homeland Security has determined that you have in fact, abandoned your lawful permanent resident status.
- The date you became subject to a final administrative order for your removal from the U.S. under the Immigration and Nationality Act, and you have actually left the U.S. as a result of that order.
- If you were a dual resident of the U.S. and a country with which the U.S. has an income tax treaty (such as Canada), the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment.
Although a person that expatriates will be treated as a nonresident alien, they may be classified as a “covered expatriate”, which would subject the person to an exit tax, similar to the tax Canada imposes on its residents when they leave Canada and become a resident of another country. The exit tax imposes an immediate tax, as well as potential future taxes on the expatriate. A covered expatriate is either a U.S. citizen or long-term resident that abandons or loses his or her status as a U.S. citizen or permanent resident, and as of the day before expatriation has:
- Average net income tax for the last five years is more than $155,000 (2013), or
- Net worth on the date of expatriation is $2,000,000 or more, or
- You fail to certify, under penalty of perjury, that you have complied with all U.S. federal tax obligations for the five years preceding the date of your expatriation or termination of residency. Certification is done using Form 8854 (more on this form later). This form is completed when filing Form 1040 (or 1040NR) for the year of expatriation.
The income tax amount of $155,000 is increased for cost-of-living adjustment each year. There is no adjustment for the net worth amount of $2,000,000.
If you expatriate and you are considered a covered expatriate you will be subject to a “mark-to-market tax”, also known as a deemed disposition of your worldwide assets, will be required to recognize gain on those assets as if they were sold at their fair market value, as of the day prior to your expatriation.
Note: If you are a long-term resident, you have the option to using the fair market value of you assets on the day your U.S. residency began. For the assets you owned when you moved to the U.S., this will, in most cases, be a higher number and therefore produce a lower gain than using the original purchase price.
Note: If, as a green card holder, you do not expatriate and give up your green card, you will be subject to U.S. taxation on your worldwide income as long as you retain your green card.
IRS Publication 4588 – Basic Tax Guide for Green Card Holders Understanding Your Tax U.S. Tax Obligations http://www.irs.gov/pub/irs-pdf/p4588.pdf