Important IRS Tax Rules for Green Card Holders
Obtaining your permanent legal resident status is the first major step on the path to full U.S. citizenship. It enables you to reside and work anywhere within the country and opens doors and opportunities not available to temporary residents or illegal aliens.
But be advised, obtaining your green card also means becoming a U.S. person in the eyes of the IRS.
Few new green card holders understand the tax implications that come with their new resident status. Immigration attorneys often don’t have the resources or know-how to advise new green card holders of their tax status—leaving it up to residents to figure it out on their own.
Whether you’re planning for your green card or you’ve recently received one, be sure to consider the following tax implications as well.
Most green card holders have income from another country, usually the one they’re emigrating from. What they don’t realize is that, as a U.S. person, they’re subject to taxation on all global sources of income.
Even if the money never touches U.S. soil, it may still be considered taxable by the IRS. It doesn’t matter if that income is taxed or exempted by a foreign country.
(Note: Some elections can be made in the first year of residency that may shield some of that income from U.S. taxation.)
Foreign bank accounts
The most important thing new taxpayers can do is familiarize themselves with the guidelines for reporting Foreign Bank and Financial Accounts (FBAR), also known as FinCEN Form 114. U.S persons are subject to FBAR reporting if the aggregate value of their foreign financial accounts is more than $10,000 at any time during the calendar year.
For many green card holders, this is easy to overlook—especially if the account is longstanding and otherwise not affiliated with your presence in the United States.
Foreign assets, property and investments
Different from earned income, foreign wealth must be disclosed on your taxes if you’re a green card holder. The threshold for foreign asset disclosure is $50,000 on the last day of the year—or if the balance of assets was greater than $75,000 at any time during the year (double if married).
Foreign assets are reported on IRS Form 8938, Statement of Specified Foreign Financial Assets.
Foreign tax credits and exclusions
Taxpayers who are subject to income tax in other jurisdictions might be eligible to receive a foreign tax credit for taxes paid in other countries. The qualifications for a foreign tax credit are subject to every individual’s unique situation. The credit is calculated on IRS Form 1116, Foreign Tax Credit.
There are also foreign earned income and housing exclusions to consider. This is especially important for new green card holders to consider, as the exclusions could reduce your tax liability significantly if you qualify. The IRS provides extensive guidance on interpreting and reporting for foreign earned income exclusions.
Pre-immigration tax planning
Before accepting your green card, you should consider U.S. tax ramifications and strategies to avoid adverse tax consequences. This is especially important if you have substantial wealth before immigrating to the United States. Planning in this situation should begin years before your U.S. residency begins.
Post-immigration and estate tax planning
Long-term green card holders may be subject to “exit tax” if they relinquish their green cards after being a lawful permanent resident for at least 8 years. Letting your green card expire and moving out of the United States without properly ending your residency with the U.S. Citizenship and Immigration Services (USCIS) and the IRS could result in severe penalties and tax consequences.
If you are planning to reside in the U.S. to the end of your days, you should consider estate tax (also called a “death tax”). Currently, U.S. residents with net assets valued below $11.58 million (double if married) at death are not subject to the estate tax. However, this exemption threshold is subject to change and should be monitored.
Penalties, fines and criminal charges
Many new green card holders find themselves in trouble with the IRS because they’re unaware of their tax responsibilities. The penalties for IRS non-compliance can be severe and may even delay or hinder progress toward full citizenship. Offshore violations also come with hefty fines and fees when prosecuted.
|Violation/failure to file:||Possible fines:|
|FBAR||As high as the greater of $100,000 or 50% of the total account balance. (Even non-willful violations can rack up fines as high as $10,000.)|
(Statement of Specified Foreign Financial Assets)
|A $10,000 fine, with an additional $10,000 for each month of noncompliance (up to $50,000).|
(Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
|A $10,000 fine or 35% of the reportable amount.|
(Annual Information Return of Foreign Trust With a U.S. Owner)
|The greater of $10,000 or 5% of the gross value of trust assets.|
(Information Return of U.S. Persons With Respect to Certain Foreign Corporations)
|$10,000, compounding monthly up to $50,000.|
(Return by a U.S. Transferor of Property to a Foreign Corporation)
|10% of the value of the property transferred (up to $100,000).|
(Return of U.S. Persons With Respect to Certain Foreign Partnerships)
|$10,000 for failure to file, compounding monthly up to $50,000.|
Failure to file is one thing; committing fraud is another.
Green card holders purposefully withholding information from the IRS, filing misleading returns or omitting factual data face severe penalties:
- Fraud relating to underpayment can be punishable by up to 75% of the unpaid tax (in addition to the correctly-determined owed amount).
- Failure to file a tax return as a green card holder is punishable by fees of 5% of the total owed balance of taxes, compounding up to 25% for continued failure to pay.
- Underpayment of taxes can result in fees ranging from 20-40% of owed taxes, depending on the circumstances and severity of the underpayment.
- Tax evasion and conspiracy to defraud the U.S. government are criminal offenses, punishable by jail time of up to 10 years and fees up to $250,000.
Green card holders should generally seek tax advice before applying for their permanent resident status. However, understanding tax obligations is something that can and should be investigated at any time after receiving a green card.
Resident tax status can be difficult to understand at first. It’s much easier to navigate with an international tax professional by your side. Hiring a CPA firm with this knowledge and experience increases your chances of staying compliant.
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