"Non-citizenship" has its privileges: An overlooked reason why a Green Card holder may NOT want to become a U.S. citizen

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U.S. Tax Residency – The “Readers Digest” Version

Last week I participated in a “panel discussion” titled:
“Tax Residency In A World Of Global Mobility: What Tax Residency Means, How To Sever It, The Role Of Tax Treaties and When Exit Taxes May Apply”

The panel included a discussion of  the “pre-immigration planning” that should be undertaken prior to becoming a “tax resident of the United States”. U.S. citizens and U.S. residents are “tax residents” of the United States and (from an income tax perspective) are taxable on their world wide income. (There are separate “tax residency” rules for the U.S. Estate and Gift Tax Regime.) For the purposes of “income taxation”, the definition of “U.S. resident” includes “Green Card holders” , who by definition are “permanent residents” of the United States. Those who come to America and get that “Green Card” have subjected themselves to the U.S. “worldwide taxation” regime. Note that a Green Card holder who becomes a “long term” resident of the United States has also subjected himself to the S. 877A Expatriation Tax Regime! In other words, a Green Card holder may NOT be able to move from American without subjecting himself to a significant confiscation of his wealth! To put it simply: If a prospective immigrant is “well advised”, the S. 877A Exit Tax rules will provide a strong reason to NOT become a “permanent resident” of the United States. But, remember:
The S. 877A Exit Tax rules apply to “permanent residents” who become “long term residents”.


“Long Term Residents” And The S. 877A Expatriation Tax

A discussion of how/why avoiding the status of “long term resident” will ensure that the S. 877A Exit Tax will not apply are here.

What is a “Long Term” Resident?

The definition of “long term” resident in found in Internal Revenue Code Sec. 877(e)(2). It reads as follows:

(2) Long-term resident

For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country

Two points are important:

1. Once a person has been a “Green Card holder” for 8 years he becomes a “long term resident” and is subject to the S. 877A Exit Tax regime; and

2. It is possible to use a “tax treaty tie breaker” provision to avoid meeting the 8 year test!
The “EB-5 Program”: A way to invest in the United States AND get a “Green Card”
The “EB-5” program is principally a way to become a “permanent resident” AKA “Green Card holder” of the United States. Having a “Green Card” is both “Good News” and “Bad News”.

First, “The Good News”:

A “permanent resident” of the United States has the right to live permanently in the United States.

Second, “The Bad News”:

A “permanent resident” of the United States is subject to the U.S. “worldwide tax system (including the S. 877A Exit Tax). This includes punitive taxation on assets that the person owned at the time that he became a “permanent resident”. (An individual moving to the United States as a “permanent resident” must consider how his “non-U.S. assets” will be impacted by the U.S. tax system! Pre-immigration planning is essential!

If one wants to simply run a business in the United States, one might consider using a visa that will avoid becoming a “tax resident” of the United States.

Options for  a “Green Card holder” is approaching the magic 8 year mark and is in danger of becoming a “long term resident”

Conventional wisdom suggests the following four options to avoid becoming a “long term resident:

1. Voluntarily abandon the “permanent resident” visa.

Note that that moving from the United States is NOT sufficient to sever “tax residency” from the United States. There are specific rules that must be followed. These rules are found in Internal Revenue Code Sec. 7701(b).

2. Downgrade to a different kind of visa

Abandon the “permanent resident visa” in favor of a different kind of immigration visa.

3. Accept “Long Term Resident” status and accept being subject to the S. 877A Exit Tax Regime
This is not a good idea for those with substantial wealth. I would suggest that you inventory your assets (including pension plans and interests in trusts) and consult with an experienced advisor. The questions are:

  • how might the S. 877A exit tax rules impact you know; and
  • how might the S. 877A exit tax rules impact you in the future?

4. Become a U.S. Citizen

Some advantages of becoming a U.S. citizen:

  • you can move from the United States and NOT be subjected to the S. 877A Exit Tax regime (although if you later renounce U.S. citizenship you will be subject to the S. 877A regime;
  • you will no longer be subject to deportation (deportation will also subject you to the S. 877A “Exit Tax” regime
  • You will have the right to vote and the right to always live and work in the United States

Some disadvantages of becoming a U.S. citizen:

    • You will always be subject to the U.S. “worldwide tax” regime wherever you live in the world. This means that you will almost certainly be subject to double taxation if you live outside the United States.
    • You will never again enjoy the considerable benefits of being a “nonresident alien” for tax purposes, when living outside the United States
    • You will have all the problems experienced by Americans abroad who live outside the United States and are “tax residents” of other countries. See for example: “The biggest cost of being a “Canada/U.S. dual filer” is the “lost opportunity” available to pure Canadians“
    • You will not (in general) have the “benefits” of U.S. tax treaties. Almost all U.S. tax treaties contain a “savings clause” that denies U.S. citizens the benefits of the treaty (note that non-citizens DO have the benefits of the tax treaty!)
    • You will NOT be able to use a “tax treaty tie breaker” provision to be treated as a “nonresident” alien for U.S. income tax purposes.

Conclusion – A reason to NOT become a U.S. citizen might be to preserve the option of using a “tax treaty tie breaker” to be treated as a “nonresident alien” for U.S. income tax purposes.

See the following Q and A:

Q. I am a U.S. “permanent resident” (Green Card Holder) and a “tax resident” of Canada who actually lives in Canada and not the United States. Can I use the “tax treaty” to become a “tax resident” of only Canada?

A. Yes, the “savings clause” does NOT apply (under the Canada U.S. Tax Treaty) to Green Card holders. A “Green Card holder” is a “tax resident” of the United States. Therefore, a “Green Card” holder who actually lives in Canada and is a “tax resident” of Canada, may use a “tax treaty tie breaker” to cease to be a U.S. tax resident. But, this decision must be made VERY CAREFULLY because the use of the “tax treaty tie breaker” by a Green Card Holder “may” have the following NEGATIVE implications:

On the other hand, there are many reasons why a Green Card Holder might want to use a “tax treaty tie breaker” to cease to be a “tax resident” of the United States. These reasons include:

Note: If you are a Green Card holder, the decision to use a “tax treaty tie breaker” should be made only after consultation with an appropriate advisor! I am not kidding! The fallout from making this election can be enormous! I will repeat the reasons why a Green Card holder must be very careful about using a “tax treaty tie breaker”:

John Richardson

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