Individuals holding U.S. green cards are considered lawful permanent residents of the U.S. even when living abroad. As such, green card holders are generally treated in the same as U.S. citizens for U.S. federal income tax purposes and are subject to U.S. income tax on their worldwide income regardless of source. As a green card holder, you must file a U.S. income tax return, make estimated tax payments as required, comply with gift and estate tax laws, and comply with the reporting requirements related to foreign bank and financial accounts. In short, a green card holder is subject to, and may avail themselves of, all of the Internal Revenue Code and Treasury Regulations.
Changes in Status
Unlike other non-resident aliens, green card holders are tax residents regardless of how many days are spent in the U.S. Continuing to hold a green card creates a continuing U.S. tax obligation regardless of immigration status. The mere fact that the U.S. Citizenship and Immigration Services (“USCIS”) no longer recognizes the validity of a green card because of a prolonged absence does not end U.S. tax obligations. A prolonged absence from the U.S. will not necessarily result in a change of status for federal tax purposes. An expired green card will also not relieve the holder of his or her obligation to comply with U.S. tax laws; the holder’s permanent resident status is deemed to continue unless such status is rescinded or administratively or judicially determined to be abandoned.
Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the individual. An administrative or judicial determination of abandonment may be initiated by the green card holder, the immigration authorities, or a consular officer. If the green card holder initiates the determination, specific procedures must be followed in order for the determination to be effective for tax purposes; merely leaving the U.S. without an intention to return is insufficient.
Beginning in 2008 a green card holder who is treated as a resident of a foreign country under the provisions of a tax treaty between the U.S. and the foreign country, and does not waive the benefits of such treaty, and notifies the Secretary of the commencement of such treatment, will also cease to be treated as a green card holder for tax purposes, but may be required to file nonresident U.S. income tax returns.
An individual who is a long-term resident of the U.S. may be required to pay an exit tax on surrender of his or her green card. A long–term resident is defined as any individual who is a U.S. lawful permanent resident in at least 8 of the prior 15 taxable years.
Special Rules Applicable to the Estates of Green Card Holders
As with U.S. citizens, green card holders are subject to U.S. gift tax on lifetime gratuitous transfers, regardless of the situs of the asset transferred, and U.S. estate tax on the value of their worldwide assets owned at death. Likewise, green card holders can avail themselves of the full annual gift tax exclusion from U.S. gift tax (indexed for inflation, this amount is $15,000 per donee) and the full estate tax exemption from U.S. estate tax (under the newly enacted Tax Cuts and Jobs Act, indexed for inflation, this amount is $11.2 million per individual).
The unlimited marital deduction from U.S. gift and estate tax for transfers between spouses, however, is generally disallowed for transfers to a spouse who is not a U.S. citizen. Upon the death of the first spouse, assets passing to the non-citizen surviving spouse will be subject to U.S. estate tax and, if the decedent’s half of the estate exceeds his/her available estate tax exemption, taxes may be due. There are planning techniques that may defer the payment of estate tax until the surviving spouse’s death. In the case of lifetime gratuitous transfers to a non-citizen spouse, a somewhat higher annual gift tax exclusion may provide some relief (indexed for inflation, this amount is $145,000).
For couples with taxable estates below their joint exemption, the focus of estate planning has largely shifted from estate tax to income tax. There are techniques available that may allow couples to shield their assets from estate tax, while also taking full advantage of opportunities to reduce or eliminate capital gains on appreciating assets. While these techniques work well for many couples, there are limitations that come into play when a spouse is not a U.S. citizen.
It is quite possible that a green card holder may be subject to estate or gift tax on their assets in more than one country, raising the issue of double taxation. As of 2017, the U.S. has entered into estate and/or gift tax treaties with seventeen jurisdictions. These treaties are designed to prevent double taxation on the transfer of the same asset (which is the subject of the U.S. estate or gift tax) by resolving issues of dual-domicile, providing additional deductions, and other tax relief.
In addition to exit taxes discussed in the previous section, certain long-term residents of the U.S. that surrender their green card may be classified as covered expatriates. Covered expatriates are taxed differently than “run-of-the-mill” non-resident aliens when it comes to a gift or bequest to a U.S. citizen, green card holder, or domestic trust. With limited exceptions, any gift or bequest from a covered expatriate is taxable to the recipient at a rate equal to the highest US gift and estate tax rate in effect (currently 40%).
For further information about this or related matters, please contact Sandra Spector or Nicole Warmerdam at 650-342-9600 or sspector@carr-mcclellan.com or nwarmerdam@carr-mcclellan.com.