On Green Cards and Tax Traps
This article with deal with what I call the two Green Card tax traps.
Recent years have seen a dramatic increase in the global number of U.S. citizens and green card holders expatriating. Putting aside the psychological hardship involved with giving up the cherished U.S. status, the exit tax imposes a significant hurdle in making the decision to expatriate. An exit tax will generally apply if the expatriating citizen or green card holder meets one of three tests, the most problematic one being the asset test. If the person has a net value of at least $2,000,000 on the date of expatriation, exit tax will generally apply. In the case of green card holders, another condition must be met for the tax to apply: the person must be a long-term green card holder (LTGCH) at the time of expatriation.
Under U.S. tax law, a person is a green card holder so long as the person has received a green card, and the card has not been judicially or administratively revoked, or surrendered at the embassy. The fact that the green card has expired for immigration purposes and cannot be used by the holder to enter the United States is irrelevant!! The holder of the expired and useless green card is still a U.S. Person for tax purposes and must file annual tax returns and FBARs, despite the person not enjoying the benefit of being able to enter the U.S. with it. This is the first trap.
In most cases I have encountered, a green card holder who does not meet the $2,000,000 asset test can expatriate and thus avoid future FBAR and tax return obligations. However, what about the person who meets the asset test?
The question becomes whether or not the person is a LTGCH, as defined by U.S. tax law. Here, special care is needed. While meeting the LTGCH definition is a numerical test, two issues arise: (i) when did the person become a green card holder for tax purposes (i.e. when does the count begin?) and (ii) can years can be excluded from the count?
The answers to both these questions are complex and fact specific. As to (ii), a year can be excluded “if such individual is treated as a resident of a foreign country (say, Israel) for the taxable year under a tax treaty between the United States and Israel and does not waive the benefits of such treaty.” In simple terms this means that an Israeli resident can exclude a year by making a Form 8833 election for that specific year.
The problem is that with regard to LTGCH, filing Form 8833 is by itself deemed an expatriation event, whether or not the person actually surrenders the green card at the embassy.* This is Trap 2! By becoming a LTGCH who has more than $2M in assets, that person keeps that status for life, unless the person surrenders the green card and pays an exit tax. In other words, such LTGCH has two choices: (i) forever be required to file FBAR and annual tax returns, even if the green card has expired, or (ii) expatriate and pay exit tax.
Thus for people worth more than $2,000,000, if holding a green card is not that important to you, dump it before becoming a LTGCH.
*Filing Form 8833 must be done carefully, as such filing can have many other consequences.