The Internal Revenue Code of the United States imposes worldwide income taxation on ALL individuals who are U.S. citizens or who are otherwise defined as “residents” under the Internal Revenue Code. “Residents” includes those who have a visa for “permanent residence” (commonly referred to as a Green Card). A visa for “permanent residence” is a visa for immigration purposes. Once an individual receives a visa for “permanent residence” he will be considered to be a “resident” under the Internal Revenue Code. His status as a “resident” for tax purposes continues until he fulfills specific conditions to sever his “tax residency” with the United States. The conditions required to sever “tax residency” with the United States are found in S. 7701 of the Internal Revenue Code. (Basically a Green Card holder can’t simply move from the United States and sever tax residency.)
In the same way that U.S. citizens are subject to taxation on their worldwide income even if they don’t reside in the United States, “permanent residents” will continue to be subject to taxation on their worldwide income until they take specific steps to sever tax residency in the United States. In certain circumstances Green Card holders living outside the United States can avoid filing some of the “forms” that are required of U.S. citizens living abroad.
The steps to sever tax residency are found in S. 7701(b) of the Internal Revenue Code. Those wishing to explore this further are invited to read my earlier posts about Gerd Topsnik: Topsnik 1 and Topsnik 2. Those “permanent residents” who qualify as “long term residents” will be subject to the S. 877A Exit Tax rules if they try to sever tax residency with the United States. It’s probably easier to secure a “permanent residence visa” for immigration purposes, than it is to sever tax residency for income tax purposes.
On September 5, 2018 I had the opportunity to participate in a conversation with Mr. Gary Clueit who has been a permanent resident of the United States for 34 years. Interestingly Mr. Clueit is one more Green Card holder who never applied for U.S. citizenship. There are both advantages and disadvantages to a “Green Card” holder becoming a U.S. citizen. One often overlooked disadvantage to a Green Card holder becoming a U.S. citizen is discussed here. In general, “permanent residents” (Green Card holders) of the United States have certain “tax treaty benefits” that are denied to U.S. citizens. Because of the “savings clause” U.S. citizens are denied the benefits of tax treaties. Interestingly (at least until now) other countries have failed to understand that the inclusion of the “savings clause” in U.S. tax treaties means that the treaty partner is agreeing that the United States can impose worldwide taxation on the citizen/residents of the treaty partner country. The reason is simple:
The primary impact of the “savings clause” is that assists the United States in imposing “worldwide taxation”, according to U.S. rules on people who are “tax residents” of other countries and who do not live in the United States!
The following tweet links to the podcast of the conversation. Anybody considering moving to the United States as a “permanent resident” should listen to this podcast.
A man of uncommon humanity – Gary @Clueit – explains some @USGreenCardLaw (from both tax and immigration perspectives) and why the #GreenCard is "Tax Kryptonite". The S. 877A Exit Tax figures prominently. https://t.co/gUmbBYr1Hx
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 7, 2018
More from Mr. Clueit after the jump …
Mr. Clueit has previously written on how the S. 877A Exit Tax affects his situation. The following two tweets link to posts which capture his writing.
First, from CitizenshipTaxation.ca:
The confiscation of your assets when they leave is only the beginning:"All the Side Effects of being a "covered expatriate" Green Card Holder" #YouCantMakeThisUp! https://t.co/CFmiv3uJ8M via @CitizenshipTax
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 7, 2018
As a long-term GC holder with no way to escape “covered expatriate” status, the article doesn’t really cover all the insidious side-effects. For example, determining the $2M net worth threshold does not cover any assets you might have had before moving to the US, or assets due to bequests from relatives that have never set foot in the US. Even after paying the exit tax on the “deemed sale” of everything you own worldwide, you will have to pay actual capital gains when you do actually sell. And every penny of any bequest or gift you make to someone resident in the US (i.e. a child or grandchild, even if they are not US citizens) is then further taxed at 40% (that they have to pay) with no limit. So, for example, if your net worth is $2.5M on the date of expatriation (i.e. covered expat), you pay the exit tax. Say your wealth increases to $250M AFTER you leave the US – if your heirs live in the US (again, whether citizens or not) and you leave that wealth to them, the entire $250M estate will be taxable to them at 40% regardless of the fact that 99% of your wealth at the time of death was created outside the US.
Even if GC holders decide to stay in the US, they are perpetually screwed. Besides never being allowed to vote (not really an issue since one never desired to be a citizen), though they are still expected to pay taxes on worldwide income. The worst comes at death:
US citizen spouses can transfer or gift an unlimited amount between each other. If you are the spouse of a GC holder the maximum transfer is $149,000 annually.
Upon death, a citizen can leave an unlimited amount to their spouse. If your spouse is a GC holder, the max is just over $5M. If you spouse is a nonresident alien, the maximum is $60,000. Amounts above that are subject to 40% estate tax.
There is also the possibility of being caught up in double estate tax issues when you die.
This is the ultimate in taxation without representation – one of the founding principles behind the creation of the US. Tea parties were held!
Second, from the Isaac Brock Society:
A companion to the video: Gary @Clueit explains the "Perils & Pitfalls of Being a #GreenCard Holder" https://t.co/sBzNf0G3MN
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 7, 2018
Perils & Pitfalls of Being a Green Card Holder
I am posting this comment of Gary Clueit that appeared on the Robert Wood article couple of days ago. Over the past few months, we have “met” Gary on FB, Twitter etc. Especially the Wednesday Tweet Rally- A group that just keeps on giving!!
by Gary Clueit
The article provides a good, if brief, overview of the perils and pitfalls of being a green card holder. The reality is somewhat bleaker.
As a long-term green card holder with no way to escape “covered expatriate” status should I decide the leave the US, I must point out a few of the other insidious side effects of being the holder of a residence permit.
If a green card holder were to decide to leave and relinquish his or her green card, here are some the issues they face in a bit more detail:
Determining the $2M net worth threshold does not cover any assets that the person might have had before ever moving to the US or assets received after taking up residence due to bequests from relatives that have never set foot in the US. The net worth amount signed into law in 2004 and was, I believe, related to the estate tax, despite being less than half the amount of the estate tax (which is indexed whereas the expatriation exit tax threshold is not). Anyone who has diligently saved for retirement and owned houses in San Francisco, Seattle or other major cities over the past dozen or so years can quite easily reach the $2M threshold. It does not make you “rich” by any stretch of the imagination. The non-indexed $2M figure simply appears to be a punitive amount designed to punish anyone for daring to want to leave the US.
Even after paying the exit tax on the “deemed sale” of everything you own worldwide, you will have to pay actual capital gains when you do actually sell since no tax treaty provides a credit for a deemed sale of anything. Outright double taxation. For example, if I own a house in Toronto and sell under normal conditions, I will pay capital gains tax on any profit in Canada. When filing my US tax return I will get a credit for the tax paid to Canada resulting in a single tax bite. However, if I own the Toronto property on the day of expatriation, the US taxes me on any paper profit. Since I have not actually sold the property, there is nothing to declare to Canada’s Revenue Agency (CRA) at that time. When I do eventually sell, CRA will then tax the actual profit, but there is no ability to get a credit from the IRS since expatriation is a terminating event.
After departure and payment of the exit tax, every penny of any bequest or gift you make to someone resident in the US (e.g. a child, grandchild or friend, even if they are not US citizens) is then further taxed at a flat 40%. Because this tax is imposed on the recipient, there is no opportunity to offset estate, wealth or inheritance taxes that might be imposed on the estate of the deceased person by another country even when there is a treaty in effect. Here is where it gets really interesting: assume your net worth is $2.5M on the date of expatriation, you pay the exit tax. Let us also assume that your wealth increases to $250M AFTER you leave the US due to hard work and good luck. If your heirs live in the US (again, whether citizens or not) and you leave all that wealth to them, the entire $250M estate will be taxable to them at 40% regardless of the fact that 99% of your wealth at the time of death was created outside the US and after you had ceased to be a resident. By what stretch of any imagination is this fair or equitable on either the expatriate or their US resident heirs?
Most foreign tax treaties contain tie-breaker clauses to prevent double taxation of those living abroad. However, if a green card holder is living overseas (on assignment, for example) and elects to use a tax treaty benefit to avoid double taxation, that in itself is considered an expatriating act.
I will point out that most of the above situations also apply to US citizens who decide to give up their citizenship, as well as to Accidental Americans who are compulsory citizens simply by being born in the US but who may never have lived, been educated in or worked in the country. The fundamental difference between the citizen and green card holder is that a citizen can only lose their citizenship through the proactive step of filing Form DS-4079. This might at least provide some ability to time events to minimize the tax consequences. A green card holder can voluntarily relinquish their card too. However, a green card holder may be denied re-entry into the US simply by staying out of the country for more than 1 year. Even a re-entry permit, applied for before leaving, is only valid for 2 years and is not be renewable. As a result, a 2 year and 1 month overseas assignment for a green card holder can result in refusal to enter upon return. You then have the alien(!) situation where you are not allowed to reside in the US by action of Customs and Border Protection, but are still considered a US resident by the IRS and still subject to FBAR, FATCA, PFIC, CFC filing requirements and taxation on your worldwide assets. Or at least until you explicitly relinquish the green card or the IRS finds out you are no longer living in the US at which point it becomes an involuntary expatriation and immediately invokes the expatriation regime and tax based on the date you were denied entry back into the US. Why is the ability to time any expatriation important? Take the case of your primary residence. If you plan to expatriate, you make sure you sell your house before that event to ensure that up to $250K profit is not taxable. If you are involuntarily expatriated for any reason, there is no tax break because you have not actually sold the house. The paper profit from the deemed sale will be added to your taxable base subject to the exit tax. When you do sell in the future, you may well be subject to tax on that profit from your new country of residence.
Even while a green card holder resides in the US, they are subject to discrimination. Besides never being allowed to vote (not really an issue since presumably one never desired to be a citizen), they are still expected to pay taxes on worldwide income (not really an issue either since almost every OECD country taxes worldwide income now). The real problems arise in estate planning:
US citizen spouses can transfer or gift an unlimited amount between each other. Green card holders have a lifetime $5.45M limit with a maximum transfer of$149,000 annually. If one spouse has a much greater net worth that the other, the ability to balance things out are extremely limited for the green card holder.
Upon death, a citizen can leave an unlimited amount to their spouse free of tax. If your spouse is a green card holder, the maximum is any unused portion of the same $5.45M above. If your spouse is a nonresident alien, the maximum is $60,000 (though only US based assets count in this case). Amounts above these limits are subject to 40% estate tax.
There is also the possibility of double taxation of your estate when you die where both the US and your home country claim your domicile and there is no double taxation treaty.
Green card holders are now also face discrimination by their home countries due to FATCA reporting. I am a UK citizen that has held UK Government (Treasury) bonds as a component of a diversified investment portfolio. These have been invested and reinvested through Nationals Savings and Investments (NS&I) for more than 40 years, long before arriving in the US. I received letters from NS&I dated 28 April, 2014 stating that due to the costs and burdens associated with FATCA compliance, NS&I would no longer deal with US Persons (citizens or residents). As each bonds matures, they will distribute the funds as a bank draft with no possibility of reinvestment. My own government is now denying me the ability to invest in its own sovereign bonds due FATCA. It seems I am a pariah everywhere!
The root cause of the problems facing green card holders, Accidental Americans and US citizens who decide to live abroad is Citizen Based Taxation (CBT), introduced at the time of the Civil War. The only other country that practices CBT is Eritrea, and their tax rate on nonresidents is a paltry 2%. Every other country uses either Residence based taxation (RBT) or Territorial Based Taxation (TBT). Green card holders are citizens for tax purposes but cannot vote, hold office, serve on a jury, volunteer to sit on local government boards in certain States (WA requires one to be a registered voter) and are ineligible to receive US government assistance when overseas, even when not in their home country. They can be stripped of their green card and deported for any infraction of the law (it used to be a felony, but apparently a misdemeanor conviction is now grounds too). This is the ultimate in taxation without representation – one of the founding principles behind the creation of the US. A tea party and a war of independence ensued in that apparently forgotten case.
Replacing CBT with RBT or TBT and replacing FATCA with Common Reporting Standard (CRS) would go some way to mitigating the issues faced by any US resident who wishes to live abroad for love or money. Exit taxes are punitive, especially on the non-US assets for foreign nationals. “Covered” expatriate status is especially egregious. If there is to be an exit tax, at least raise it to a level commensurate with the indexed estate tax.
I was recruited to come to the US on an L-1 visa valid for 3 years because I possessed unique skills in my field. I acquired my education and experience overseas at zero cost or burden to the US taxpayer. Before the L-1 expired, the company I was working for decided to apply (and pay) for a green card on my behalf rather than them having to renew a short-term visa on an ongoing basis. I eventually left and started my own company followed by several other companies as well as acquiring others. I have exclusively funded all startups and acquisitions with my own capital and have employed US citizens, provided them with health and retirement benefits and paid all business and personal taxes due on worldwide income despite having the ability to “defer” tax on overseas subsidiary earnings like large corporations do. I have no problem paying taxes – they are the price we pay for living in a civilized society with modern infrastructure. However, should I decide I wish to retire back to my home country, or elsewhere, I find it incredulous that I should continue to be required to pay taxes on my worldwide income when I no longer receive any benefit from the US. I would not even be a burden to Medicare which I have paid for all the time I have been employed in the US. The argument used against citizens who live abroad is that they still receive protection from the US via its diplomatic presence and citizenship offers other (unspecified) benefits. How does this argument, assuming it were true, apply to a green card holder who will receive zero benefits or assistance from the US when living abroad nor has any absolute right of return to the US?
Before I moved to the US, I lived and worked in several countries, including Australia, France and South Africa. Each time I moved, I filed a “final” tax return with the country I have been living in and that was the end of it. No exit taxes or extra paperwork ever. Why is the US different from everyone else in attempting to tax not only its citizens living abroad, but non-citizens too who made the mistake of staying longer than the arbitrary 8 out of the last 15 years (a change made after I was already here that I only found out about when it was too late)?
Attempting to explain any of this to most homelanders usually elicits one of two responses: a) disbelief that anyone could be treated this way, or, more commonly, b) “suck it up, you’re obviously one of those wealthy tax evaders”.
Just like cities that impose enormous hotel accommodation and other tourist taxes and get away with it because it only affects nonresidents who cannot vote, so too does it appear to be the plight on green card holders as well as Accidentals and citizens living abroad (who can vote but that vote is diluted to the point of being irrelevant). The residents of the cities as well as homelanders in general actually approve of unfair taxation of those nonresidents who cannot fight back since it increases their local tax coffers and reduces the amount they have to contribute themselves. The only example that seems to penetrate the consciousness (if not conscience) is to ask how one would feel if relocating from Massachusetts to California and MA continued to require one to continue to file and pay tax on all of one’s income because there is an ongoing benefit from previously being born or having lived in the Great State of MA. Even if MA were to provide credits for some taxes paid in CA, one would need to file multiple returns and likely need the costly assistance of a professional.
Disclaimer: I am not a lawyer nor an accountant and have better things to occupy my time than develop too deep an understanding of all the details, nuances and other gotchas. Unfortunately, I have to spend an inordinate amount on hiring these professionals each year to understand the numerous, complex, “evolving” rules and regulations that apply to my situation. And to ensure that all my tax returns, FBARs and other forms are filed accurately and on time lest I should have to pay usurious penalties that again seem designed to punitively punish anyone for having the temerity of living abroad or operating a foreign (to the US) bank account.
For more on Green Cards please see the following three articles by John Richardson:
Green Card Holders; the Tax Treaty TieBreaker rules and taxation of subpart F and PFIC income
Green Card Holders, the Tax Treaty Tie Breaker and REporting Forms 8938, 8621, and 5471
Green Card Holders, the Tax Treaty Tiebreaker and Eligibility or Streamline Offshore