This post is on the tax consequences of ‘expatriating’ for green card holders and US citizens; in other words, giving up your green card or citizenship. A green card is what US ‘lawful permanent residents’ use as proof of their immigration status.

Green card holders are deemed permanent residents of the US for federal tax purposes so they are subject to federal tax on worldwide income, and various reporting requirements, irrespective of whether they physically reside in the US.

Note that the definition of residency for immigration and tax purposes is not the same. Therefore, an individual can cease residing in the US and fail to renew his green card, but remain resident for tax purposes unless they follow the correct procedure for surrendering this status (described in Internal Revenue Code sec. 7701(b)(6)) by filing a form I407.

Giving up a green card can also trigger the ‘covered expatriate regime’ if the individual is a ‘long-term resident’ and meets one of three criteria: a federal tax threshold, an asset test, or does not certify compliance with the US federal tax rules for the previous
five years. An individual will be a long-term resident if they have held a green card during any part of eight of the most recent 15 years.

As a ‘covered expatriate’ the individual may be subject to an exit tax (see Internal Revenue Code sec. 877a). In essence, this is a deemed sale of the individual’s worldwide assets, as well as a tax charge on pensions and deferred compensation. This is followed by a tax on any future gifts or bequests they make to US citizen recipients (and which is imposed on them) for the rest of the expatriate’s life. Individuals may be able to plan their affairs to avoid becoming a ‘covered expatriate’ by, for example, gifting assets before expatriating or deciding not to expatriate.

Ultimately, individuals wishing to give up their green cards should consider doing so before they hold it for eight years.

Individuals with a green card but who live in a country with which the US has an income tax treaty may be eligible to file their US return as a ‘treaty non-resident’. However, this should be approached with extreme caution because filing as a treaty non-resident can result in an expatriation for tax purposes, subjecting the person to the exit tax. Years for which the individual filed as such do not count towards the eight-out-of-15-years test.

Individuals who are approaching eight years of US residence can therefore retain their green card without being subject to the exit tax. However, filing as a treaty non-resident can trigger this if the individual held the green card for eight years before starting to file as a non-resident.

Note also that living outside the US or filing as a treaty non-resident could (from an immigration perspective) put a green card at risk. Green card holders residing outside the US can lose their status as lawful permanent residents and be forced to give up their cards on re-entry to the US – referred to as involuntary termination. They should always seek both immigration and tax advice on the consequences of living outside the US.

US citizens wishing to give up their citizenship need to follow a different procedure. This involves making an appointment at a US embassy or carrying out an ‘expatriating act’. However, such individuals will remain resident for US tax purposes until appropriate notice has been given to the US government.

Relinquishing US citizenship will trigger the ‘covered expatriate’ rules unless the individual was either a dual citizen at birth or a US citizen at birth but renounces before they turn 18 and a half and meets other specific requirements. In all cases avoiding the covered expatriate regime requires compliance with US taxes for the five years before the date of renunciation or relinquishment.

Have questions about abandoning your Green Card?

Contact John Richardson.