How a Tax Treaty Benefits Green Card Holder Taxation

Tax Treaty & Green Card Holder Taxation

When a person is considered a Lawful Permanent Resident, they are taxed by the Internal Revenue Service similar to a US citizen. That means that they are subject to US taxation on their worldwide income. This is true, even if they reside outside of the United States and all their income is sourced from foreign countries. In addition to having to pay tax on their worldwide income, Green Card Holders are also required to report their foreign accounts, assets, investment, and income on various international information reporting forms such as the FBAR and FATCA Form 8938. But, one potential tax and reporting minimization tool that Green Card Holders can use is that they can make a treaty election to be treated as a foreign person — and only subject to US taxation on their US-sourced income. Let’s take a brief look at what the IRS provides for taxpayers seeking to make this type of treaty election on Form 8833.

As provided by the IRS:

Claim Non-Resident Alien Status

• • • As a green card holder, you are a U.S. tax resident.  However, the definition of residency under U.S. tax laws does not override tax treaty definitions of residency. If you are a dual-resident taxpayer (a resident of both the United States and another country under each country’s tax laws), you can still claim the benefits under an income tax treaty.

    • The income tax treaty between the two countries must contain a provision that provides for resolution of conflicting claims of residence (tie-breaker rule). If you would be treated as a resident of the other country under the tie-breaker rule and you claim treaty benefits as a resident of that country, you are treated as a nonresident alien in figuring your U.S. income tax. For purposes other than figuring your tax, you will be treated as a U.S. resident. For example, the rules discussed here do not affect your residency time periods as discussed in FAQ 17 above.

    • If you are a dual-resident taxpayer and you claim treaty benefits as a resident of the other country, you must file a return by the due date (including extensions) using Form 1040-NR, and compute your tax as a nonresident alien.

    • You must also attach a fully completed Form 8833 if you determine your residency under a tax treaty and receive payments or income items totaling more than $100,000. You may also have to attach Form 8938 (as discussed in the Other Forms You May Have to File section of Publication 519, U.S. Tax Guide for Aliens, under Chapter 7).

    • For more information on reporting treaty benefits, see “Reporting Treaty Benefits Claimed,” in Chapter 9 of Publication 519, U.S. Tax Guide for Aliens.

    • If you are a long-term resident and you claim treaty benefits as a resident of another country pursuant to a tax treaty, you may be subject to the expatriation tax. Please refer to the expatriation tax provisions in Publication 519, U.S. Tax Guide for Aliens, and in later questions.

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