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Exit tax for long-term permanent residents

For many British expats, getting a Green Card seems like a good idea. However, most don’t realise that once they become a long-term permanent resident they will be exposed to an exit tax.

What’s the appeal of a Green Card?

A few years after coming to live and work in the US on a non-immigrant visa, there is often the possibility of applying for a ‘Green Card’.

Being a Green Card holder sounds very attractive as it means:

  • No more periodic visa renewals
  • Permission to work in the US is no longer tied to the particular job specified on a visa
  • On returning to the US from a foreign trip, joining the faster line to exchange greetings with a Border Force representative

So, what’s the catch?

For someone already living in the USA, acquiring a Green Card should involve no immediate change in the amount of Federal Income Tax payable. A Green Card holder, like a US citizen, is taxable on world-wide income. However, if you are already treated as a US tax resident by virtue of time spent in the US each year, that world-wide tax base already applies to you.

The possibility of any ‘nasty’ surprise therefore lies in the future.

There is a simple test to determine if acquiring a Green Card will be lining you up for such a surprise. Starting from the date when you acquire a Green Card, do you expect to be still living and working in the USA seven years later?

A ‘yes’ answer means you will be faced with a special, one-off, exit tax when you formally cease to have Green Card status.

Consequently, if you answered ‘yes’, the way to ensure a simple tax life when you do cease living/working in the USA is not to apply for a Green Card in the first place.

The possibility of any ‘nasty’ surprise therefore lies in the future.

What is this exit tax? 

  • Only long-term holders of a Green Card are liable for the exit tax.
  • Any such individual is designated a long-term permanent resident of the US.
  • long-term permanent resident status is determined by reference to the date when Green Card status is formally revoked. This is known as the ‘expatriation date’.
  • A long-term permanent resident is an individual who was a Green Card holder in at least eight taxable years during the period of 15 taxable years ending with the taxable year that includes the expatriation date.

Example:

  • Green Card status is formally revoked in 2020.
  • If Green Card status commenced in 2014, or later, the exit tax does not apply.
  • If Green Card status commenced in 2013, or earlier, there is an exit charge in 2020, as:
    1. The 8-out-of-15-year test is satisfied.
    2. The 8 years are: 2013 – 2020
  • For Federal Income Tax purposes, a long-term permanent resident is deemed to have disposed of his/her world-wide assets, at their fair market value, the day prior to the expatriation date.
  • So, tax is payable to the IRS on all the unrealised gains.
  • A deemed sale does not involve any proceeds being received. So, there are likely to be cash-flow issues concerning payment of the exit tax.
  • All in all, a high price to be paid for avoiding visa renewals and have an easier time at the airport.

Is there a fool-proof strategy to avoid the exit tax?

 In short: no.

  1. Formally surrendering a Green Card ‘early’, in order to avoid hitting the 8-out-of-15-year tripwire would be a tricky strategy whilst wanting to continue living and working in the USA. Specialist advice from a US immigration Law attorney would be required. Individual circumstances might preclude a change back to a non-immigrant visa.
  2. Not surrendering your Green Card at the time of permanently leaving the USA would mean:
    • Federal Income Tax on world-wide income would continue to apply, despite you no longer living in the USA.
    • In addition to the hassle factor of having to continue completing Federal Income Tax returns, there would be the expense of engaging a professional tax return preparer.
    • Unless you leave the USA to live in a country which is a tax haven, there is the possibility of double taxation. Any recourse to a tax treaty for relief from US tax would itself be a trigger for the exit tax.

Making the most of your free consultation with Blick Rothenberg

Your free consultation with Blick Rothenberg can be used to:

  • Understand exactly how the exit tax would impact you.
  • considering if/when an application might be made if you have not yet applied for a Green Card.