Tax Consequences of a U.S. Green Card
The acquisition of a U.S. green card entitles the foreign national to the right to make the U.S. their permanent home. However, it also subjects the holder of this status to worldwide taxation and extensive IRS reporting obligations.
The U.S. income tax concept of worldwide taxation extends to foreign income and gains that accrued prior to the establishment of U.S. residency but which are realized as a U.S. resident. The federal tax rates that apply quickly graduate to 37% with the potential for additional surcharges for certain types of foreign income.
As someone afforded U.S. permanent resident status, the green card holder is also likely to be subjecting their domestic and foreign assets to the U.S. gift and estate tax system (with rates that quickly graduate to 40%).
As time goes by and a foreign national continues to live in the U.S. and develop deeper roots into the community, it becomes imperative that a U.S. based, cross border estate plan be implemented. Without such a plan, the family remains at risk for the potential of a significant U.S. gift or estate tax assessment.
As retirement approaches (or when residency termination occurs for another reason such as a divorce, employment reassignment, etc.) events may warrant the relinquishment of a green card. In such a case a carefully crafted plan is needed to address the “exit tax” applicable to certain former green card holders.
When a former green card holder is covered under these tax rules (and classified as a “covered expatriate”) relinquishment of the green card can result in a deemed sale of appreciated assets (i.e. an exit tax).
Classification as a covered expatriate can also result in harsh inheritance taxes to any heirs who remain in the U.S.
Green card holders need advice that goes beyond the basic immigration law in order to avoid these very harsh and unexpected surprises.