Armed with these crucial insights, you can confidently navigate the intricacies of the U.S. tax system as a Green Card holder, taking control of your financial obligations.
Understanding worldwide taxation is crucial for Green Card holders. It means that as a Green Card holder, you are subject to U.S. taxation on your global income. This includes income from all sources outside and inside the U.S., which must be reported to the Internal Revenue Service (IRS). In other words, a Green Card holder must report both US and foreign income to the IRS. The U.S. tax net is cast quite broadly, as it sweeps up Green Card holders' property and income outside the United States. On the contrary, non-resident individuals are typically subject to United States taxation only on specified items or types of income.
I will skip the detailed explanation of the definition of non-resident individuals in this article. Please remember that a Green Card Holder is always classified as a U.S. tax resident, as is a US citizen under the US income tax rules. As you know, Green Card holders may be treated differently from US citizens under US gift and estate tax rules. The specifics of this difference are beyond the scope of this blog.
The worldwide income has exceptions. One excludes certain foreign-earned income and dividends paid by foreign subsidiaries to ten percent of domestic corporate shareholders from non-subpart F income. It would be best to take advantage of the foreign-earned income exclusion whenever possible, as it applies to many Green Card holders staying overseas.
The rationale for the worldwide taxation for Green Card holders rests in the US government's statutory authority, not the US Constitution.
One of the most significant issues for Green Card holders' taxation is the potential for double taxation. This can occur due to persons and transactions crossing borders, and it's a crucial aspect to be aware of.
Accurate reporting of cross-border transactions is of utmost importance for Green Card holders. Transactions such as selling property abroad, transferring money to the U.S., or business dealings with foreign entities must be reported with precision to avoid any potential issues.
Staying updated on the IRS thresholds for reporting these transactions is essential to avoid inadvertent omissions. However, the value of working with a tax professional who understands the nuances of cross-border taxation cannot be overstated. It can provide you with the reassurance and confidence you need in these scenarios.
Based on my experiences, these are the types of transactions that you must be careful of:
1. You receive a foreign pension, dividends, interests, and capital gains.
2. You own at least ten percent of the foreign corporation's stock, measured by vote or value.
3. You are a US resident shareholder or one of the US resident shareholders who own more than 50 percent of the stock of a foreign company, as measured by either vote or value on any day during the corporation's taxable year.
4. You own the passive foreign investment company (PFIC). A foreign corporation is a PFIC if 75 percent or more of its gross income for the taxable year consists of passive income (passive income test.) A foreign corporation is also a PFIC if the average percentage of the fair market value or adjusted basis of its passive income-producing assets represents at least 50 percent of the value or adjusted basis, as applicable, of all of the entity's assets.
5. You are a related party to the business activities or fixed place of business in the U.S. by a foreign company.
It is impossible to describe these rules in detail here, but you should be aware of red flags.
Suppose you have a financial interest in or signature authority over foreign financial accounts, including bank accounts, brokerage accounts, mutual funds, or trusts. In that case, you may need to file a Report of Foreign Bank and Financial Accounts (FBAR). For Green Card holders, the FBAR requirements are stringent, and non-compliance can lead to significant penalties.
You must file an FBAR for each calendar year during which the aggregate amount(s) in the foreign account(s) exceeded $10,000, valued in the United States (U.S.) dollars, at any time during the calendar year.
It's crucial to understand that the penalties for failing to file an FBAR can be severe. For willful violations, the penalty can be as high as $100,000 or 50% of the account balance. Non-willful violations carry a penalty of up to $12,500. This underscores the urgency and importance of adhering to the rules.
Additionally, if you meet the reporting threshold, you may need to file Form 8938, Statement of Specified Foreign Financial Assets. It's important to differentiate between FBAR and FATCA requirements and report accordingly.
The reporting threshold is if the aggregate value of all the individual's specified foreign financial assets exceeds $50,000 (or a dollar amount higher than $50,000, as the IRS may prescribe).
Receiving a gift or inheritance from a foreign person can have tax implications for Green Card holders. The IRS has specific reporting requirements for such gifts and inheritances, and it's essential to understand these to avoid penalties. The primary purpose of this form is to inform the IRS that the receipt is not an income but a gift.
Gifts from a foreign person that exceed a certain amount must be reported on Form 3520. It's vital to be aware of this threshold and ensure all necessary forms are filed to maintain compliance with U.S. tax laws.
The form does not require detailed information. Instead, it requires a taxpayer to report whether the foreign donor is an individual, corporation, partnership, or estate and whether the foreign donor acted as a nominee or intermediary for another person. The IRS requires you to have a brief description of the property received. The US Department may be required to provide additional information to the IRS upon request.
The current threshold is $100,000 a year, and a taxpayer needs to separately identify each aggregated gift over $5,000 from a nonresident alien. As you know, there is a much lower threshold for gifts from foreign corporations or partnerships.
The penalties can be up to 25% of the amounts received. If you don't file Form 3520 on time, please ask the IRS for your reasonable cause statement for the delay. In general, it is difficult to reduce the penalty at this point.
If you decide to relinquish your Green Card, you may be subject to the U.S. Exit Tax. This expatriation tax applies to long-term residents considered 'covered expatriates.'
To become a long-term resident, you must first have a Green Card for at least eight years from the last 15 years. One day in a year as a Green Card holder counts as one year for this purpose. Once you are a long-term resident, you need to pass the three tests:
1. The individual's average net income tax (as defined for the period of five tax years ending before the date of the loss of Green Card is more significant than $201,000 for 2024. (indexed for inflation)
2. As of that date, The individual's net worth is $2,000,000 or more.
3. The individual fails to certify under penalty of perjury that he has met the requirements of the Code for the five preceding tax years or fails to submit evidence of his compliance as the RIS may require.
You are a covered expatriate if you meet any of the tests above. Once you become a covered expatriate, different rules and taxes may apply to you.
Determining whether you fall into this category and what assets are subject to the tax is critical. Proper planning and consultation with a tax professional can help mitigate the impact of the Exit Tax.
Becoming a Green cardholder is a massive step for a Cross-Border professional like you. That decision will change the course of your life. It did for me. I obtained my Green Card in my 30s while working for a large international accounting firm. It changed my life, my perspective, and my family members. It impacted my entire family, including my parents living in my home country.
You only live once, and life is short from one perspective. You want to manage your Cross-Border life wisely for yourself and your family members. That is why planning is an essential factor for you.
Tax planning for Green Card holders should be personalized to fit individual circumstances. This means considering factors such as length of U.S. residency, ties to your home country, and plans for living or working abroad.
Engaging with a tax advisor who can tailor a tax strategy to your situation can be a wise investment. They can assist with optimizing your tax position, ensuring compliance, and planning for any eventualities, such as the decision to return to your home country or retire abroad.
Please feel free to comment on my blog below. I welcome your input.