There are many “permanent residents” of the United States AKA Green Card holders who have never become U.S. citizens. Citizenship is part of one’s identity. There are many reasons why a “permanent resident” of the United States would NOT become U.S. citizens. There are also many reasons why a “permanent resident” would become a U.S. citizen.
This post explores some of the factors that might influence one’s decision to become a U.S. citizen. What follows is an answer that I posed on Quora. Read John Richardson's answer to Are there any real advantages of becoming a US citizen while you already have a green card? on Quora
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.
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 9, 2018
In general, the tax compliance community has not been helpful to Americans abroad in responding to the “transition tax”. Few practitioners have made any effort to consider whether the “transition tax” applies to Americans abroad and/or whether it can be mitigated by treaty provisions. Furthermore, (assuming that the “transition tax” does apply) few have explored the full range of options available to affected taxpayers. (These options may include: paying the tax outright, paying the tax over 8 installments, maximimizing the effects of tax credits available at the shareholder level or maximizing the effects of tax credits available at the corporate level – the 962 election. Of course the attractiveness of these options is influenced by whether people intend to retain U.S. citizenship.)
By failing to consider the various “Faces Of The Transition Tax”, some in the tax compliance community, are effectively “bullying” taxpayers into responses that are not in the interest of the taxpayer.
Surely Circular 231 obligations don’t prevent an objective consideration of the whole range of options!
It is within this context, that I find the recent discussion of Nina Olson of IRS Tax Advocate refreshing. But, wait. At least in terms of how the IRS administers the law, “Congressional intent” should matter
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 9, 2018
Her analysis includes:
In other words, the memo concluded that the full amount of the Section 965 liability becomes due immediately – not ratably over the eight-year period the law gives taxpayers the option to make payments. As a result, any “overpayment” of non-Section 965 liabilities over the 8-year period cannot be refunded or applied as estimated tax for a future period until the full Section 965 liability is paid in full.
As a practical matter, this interpretation sharply limits the value of Section 965(h), and in some cases, it may even render it meaningless. Large corporations frequently overpay their estimated taxes for a variety of reasons, including to minimize the risk they may become liable for underpayment interest. Some may even have “overpaid” by most or all of their Section 965 liability. According to the IRS’s interpretation, those corporations will not receive any of the benefits Congress provided by enacting Section 965(h).
It may be that the IRS’s interpretation is legally correct, and congressional tax-writers failed to consider the interaction of IRC 965(h) with existing provisions governing refunds and credits. Some in the private sector generally agree that the IRS cannot pay refunds after a return is filed and the tax has been assessed, but they have suggested that – before the liability is assessed – the IRS may at least pay the estimated tax refunds requested on Form 4466. I have requested the Office of Chief Counsel to take another look at the issue and consider alternative approaches. Where Congressional intent is clear, it is the job of administrative agencies to give effect to that intent to the extent feasible. In some cases, that may require adopting a plausible interpretation, even if it not the “best” interpretation.
Anthony Parent of IRS Medic interviewed Montana CPA David Sutherland and me about the transition tax. My views are well known. It was particularly interesting to hear Mr. Sutherland (a CPA with a number of Canadian clients affected by the transition tax) discuss this issue. Mr. Parent’s full blog post is here.
The following tweet will link you to the YouTube video:
Individuals can make a certain election under Code Section 962 to be treated as a corporation for purposes of the transition tax. Assuming the maximum tax rates and not making the election under Code Section 962, the tax rate to an individual shareholder would be 17.54% (15.5% for a corporate shareholder) on accumulated E&P attributable to the corporation’s cash and cash equivalents and approximately 9.05% (8% for a corporate shareholder) on the accumulated E&P attributable to the corporation’s non-cash assets.
So, what is the 962 election and how can it reduce the “transition tax”?
(a) General rule Under regulations prescribed by the Secretary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year—
(1) the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under sections 1 and 55) be an amount equal to the tax which would be imposed under section 11 if such amounts were received by a domestic corporation, and
(2) for purposes of applying the provisions of section 960  (relating to foreign tax credit) such amounts shall be treated as if they were received by a domestic corporation.
An election to have the provisions of this section apply for any taxable year shall be made by a United States shareholder at such time and in such manner as the Secretary shall prescribe by regulations. An election made for any taxable year may not be revoked except with the consent of the Secretary.
(c) Pro ration of each section 11 bracket amount
For purposes of applying subsection (a)(1), the amount in each taxable income bracket in the tax table in section 11(b) shall not exceed an amount which bears the same ratio to such bracket amount as the amount included in the gross income of the United States shareholder under section 951(a) for the taxable year bears to such shareholder’s pro rata share of the earnings and profits for the taxable year of all controlled foreign corporations with respect to which such shareholder includes any amount in gross income under section 951(a).
(d) Special rule for actual distributions
The earnings and profits of a foreigncorporation attributable to amounts which were included in the gross income of a United States shareholder under section 951(a) and with respect to which an election under this section applied shall, when such earnings and profits are distributed, notwithstanding the provisions of section 959(a)(1), be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied.