Is your client thinking of obtaining a Green Card? Remind them of the tax consequences!
With all of the current interest in immigration reform, foreign nationals that spend a lot of time in the United States may consider going through the process of obtaining a Green Card to become a legal permanent resident. Generally speaking, Green Cards provide their holders with the ability to enter and exit the U.S. with the same ease as U.S. citizens. Although, the process may be tedious and expensive, most holders find it is definitely worth the hassle. With that being said, most people are consumed by the immigration portion of holding a Green Card and completely overlook the tax implications. So, before your clients make a mad dash to their immigration lawyer’s office, you should advise them to consider the following:
Taxpayers will be subject to tax on their worldwide income
The United States is one of the few countries where taxpayers are still required to report and pay income tax on their worldwide income, even after they have established residency in a foreign country. For U.S. citizens and Green Card holders, this means the U.S. is entitled to tax the wages, interest, dividends, capital gains, pension income, etc. they earned while living and working overseas. Taxpayers may also be subject to tax in their new home country on this same income. While there are ways to mitigate this duplicate taxation (via tax credits, exclusions, treaty positions, etc.) it is rarely enough to eliminate the burden entirely.
U.S. immigration status does not dictate a taxpayer’s U.S. tax filing requirements
Are any of your clients tired of paying U.S. taxes and have decided to let their Green Card expire? While that may be an effective way to prevent a taxpayer from entering and exiting the U.S., it unfortunately does not terminate their U.S. residency from a tax perspective. Taxpayers will continue to be required to file their U.S. tax returns and pay tax on their worldwide income each year until their Green Card has been administratively surrendered. There are specific steps required to properly surrender a Green Card. The taxpayer will need to receive written confirmation from a U.S. Consular Officer that their Green Card has been properly surrendered along with the effective date. This may also require one last tax filing.
Don’t forget their Foreign Bank Account Report (FBAR) filing requirements!
Taxpayers must also consider that as long as they are considered a legal permanent resident and hold a Green Card, they are required to report all of their foreign bank and investment accounts on FinCen Form 114 (formerly known as Form TD F 90-22.1 or the FBAR form). Failure to file this form has both civil and criminal penalties, including jail time, and the potential forfeiture of up to 50% of the account balances of all undisclosed accounts. In addition, the recent implementation of the Foreign Account Tax Compliance Act (FATCA) regulations, which allow the foreign bank and investment companies to report this information directly to the IRS, has caused this to be even more of a hot topic.
These scenarios can be very complex and cause serious damage to a taxpayer’s wallets so, as a tax practitioner, your job is to have the insight to guide them towards the proper steps to prevent costly mistakes.