- 1 How Permanent Resident Income is Taxed
- 2 US Tax Systems Basics & Green Card Holders
- 3 Foreign Tax-exempt Income is Usually Taxable
- 4 Expired Green Card & US Tax
- 5 Foreign Account & Asset Reporting for Green Card Holders
- 6 Green Card Holder Treaty Position
- 7 Relinquish and Become a Visa-Holder
- 8 Offshore Amnesty Program Summary
- 9 Can I Just Start Filing This Year Instead?
- 10 Golding & Golding: International Lawyers For Clients Worldwide
How Permanent Resident Income is Taxed
Some of the most complicated IRS tax rules involve lawful permanent residents — otherwise referred to as Green Card Holders and the US tax implications of being a permanent resident. What makes tax law involving green card holders so complex, is that even though green card holders are not US citizens of the United States — they are still considered a US Person for tax purposes (aka a Legal Tax Resident). Technically, a Green Card Holder is a Citizen of a foreign country — but maintains the right to permanently reside in the United States (as long as they meet the annual physical residency requirements). And, once a foreign person becomes a Green Card Holder (absent a Form 8833 election if it is a treaty country), the permanent resident becomes subject to US tax on their worldwide income similar to a US citizen. That is the case whether or not they reside in the United States. Let’s review the basics about how Green Card Holders are subject to US tax and have to file US tax returns.
US Tax Systems Basics & Green Card Holders
The United States follows a Citizen-Based Taxation *(CBT) Tax Model. Right off the bat, this is a misnomer — because in actuality the US follows a US Person-based tax system. As a result, all US persons are subject to US tax on their worldwide income. It does not matter if the US Person resides outside the United States — and it does not matter if the income is generated from sources within the United States or sources outside of the United States — they are still subject to US Tax. For example, Drew is a permanent resident who resides outside of the United States in a foreign country. In addition, all of his income is foreign-sourced. Nevertheless, Drew must file a US tax return to report his worldwide income — because he is considered a US person.
Foreign Tax-exempt Income is Usually Taxable
Especially in Asian countries, it is very common for Passive Income (such as dividends, interest, capital gains or royalties) to be non-taxable in that country. For example, a foreign non-resident alien who earns all of their foreign passive income from an Asian Foreign Financial Institution is not (usually) taxed on the interest, dividends, or capital gains (exceptions apply). But if that same person is actually a lawful permanent resident who resides overseas (not taking into consideration the Green Card 6-month residence requirement), then they are subject to US tax on that income — making matters worse, is that since they did not pay any tax abroad — they will not have any foreign tax credits to apply, to reduce their US tax liability.
Expired Green Card & US Tax
This is where it gets a bit more complicated. The green card is actually just a representation of permanent resident status. Therefore, until the taxpayer formally relinquishes their green card (usually by filing a Form I-407) they are still considered a US person for tax purposes — they just lose their travel rights to the US — which is usually the primary purpose for many foreign nationals to obtain permanent residence in the United States in the first place — a double-whammy.
Foreign Account & Asset Reporting for Green Card Holders
In addition to having to report worldwide income, Green Card Holders also have to report their global assets on a broad range of different IRS international information reporting forms. Some of these forms include the FBAR (FinCEN Form 114), FATCA Form 8938, Form 5471, and Form 8865
Green Card Holder Treaty Position
If the person is a Lawful Permanent Resident/Green Card Holder and resides abroad, they may be able to make a treaty position that they should be treated as a foreign resident for that tax year. This may minimize any tax liability to the US government.
Relinquish and Become a Visa-Holder
For some Taxpayers who are Lawful Permanent Residents and residing abroad (unless they obtained approval to reside outside of the United States for more than six months (aka re-entry permit)) — chances are at some point the Green Card will be confiscated at a checkpoint at the airport. Green Card Holders in this situation may want to consider relinquishing their green card and instead try to acquire Tourist (B1/B2) or Investment (EB-5) status.
Offshore Amnesty Program Summary
The Offshore Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting, including Green Card Holders worldwide.
Some of the more common programs include:
Can I Just Start Filing This Year Instead?
No, unless the current year is the first year you had a reporting requirement. If you had a prior year reporting requirement, but only begin to start filing in the current year (Filing Forward) it is illegal. In the world of offshore disclosure, this is referred to as a Quiet Disclosure. The IRS has warned taxpayers that if they get caught in a Quiet Disclosure situation, it may lead to willful penalties and even a criminal investigation by the IRS Special Agents.
Golding & Golding: International Lawyers For Clients Worldwide
Golding & Golding International Tax Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.