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.

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.
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.