Supports Cross Border Professionals and Families
I will explain the tax consequences when a green card holder decides to return to his home country permanently. You can consider these pros and cons when making your decision. I encourage you to consult with your tax professional to find out the specific impacts of your situation.
- Obtain US Citizenship
You can apply for US citizenship if you meet the criteria. You become a US person for US tax purposes until you renounce your citizenship. Being a US citizen has pros and cons.
You acquire the obligation of US tax filing and reporting wherever you are. One may have a different opinion on this. However, this is a significant burden to you. You would not generally have sufficient time to handle two countries’ tax requirements. Besides, the foreign tax credit makes your US tax returns more complicated. I say that this is a significant disadvantage from a tax standpoint.
On the other hand, you enjoy the lifetime gift/estate tax exclusion onto your worldwide assets transfer wherever you are. Since you are a US person from a tax perspective, your worldwide assets transfers are subject to US taxes. Luckily, the 2023 exemption is $12.92 million, and because of this amount, most US citizens do not have to pay gift/estate taxes to the IRS.
However, once your gifts/estate exceeds the lifetime exemption, you will face an almost 40% tax rate over any gift/estate over $1 million. Please note that in some cases, you may be better off paying exit taxes than paying US gift/estate taxes when your assets are significant. Please read my brief description of the exit tax below.
- Give up Green Card
Most of you will have to abandon your green card because being a green card holder from a US tax perspective means that you are a US tax person wherever you are, except for gift/estate taxation. Unless you give up your green card, you must continue to file and report worldwide income to the IRS.
You will be free from US tax obligations once you abandon your green card. This is a significant advantage.
As a slight disadvantage, you must file the final US tax returns with a unique form called Form 8854. A long-term green card holder (8 years or more) must file this form. You do not have to file this form if you are not a long-term green card holder.
Another disadvantage is the US exit tax. You may be paying the US exit tax if you meet the criteria. You are called a covered expatriate. The most notable bar is that your net assets at abandonment exceed $2 million. You pay taxes on unrealized capital gains over a significant exemption amount, IRAs, and deferred compensation items such as 401(k), although you can elect to defer paying taxes. Please note that you may not settle exit taxes even if you have more than $2 million. There are many lucky ones. Another potential pitfall is covered gifts/bequests to US persons in the future. Currently, the law of taxing these items is enacted. However, the IRS still needs to issue the regulations. If the IRS starts levying this tax, you will be paying 40% taxes on the items.
There is room for tax planning for most individuals facing exit taxes. I recommend consulting with your tax advisor well before your planned exit.
- Keep Green Card
First, being away from the US, you must clear the hurdles of immigration laws if you want to keep your green card. I will defer the guidance to immigration law attorneys. You may need to return to the US as often as every six months.
You are a US person from the tax standpoint. You have pros and cons that I described in being a US citizen.
One notable tax difference between a green card holder and a US citizen overseas lies in gift/estate taxes. US citizens are considered domiciled in the US for gift/estate taxes. However, a green card holder may be domiciled or non-domiciled based on the situation. If you are non-domiciled in the US, you cannot use the lifetime exemption; however, your gift/estate will only be taxed on the US assets. Therefore, you can avoid paying the transfers of non-US tax assets. As a non-domiciled person, you also pay no gift (not estate taxes) taxes for transferring US intangible assets such as stocks.
This difference creates room for tax planning for gift/estate situations.
- Final Thoughts
I have summarized the pros and cons of US taxes under these situations. This is only one side of the coin. It would help if you found out the impacts of your home country’s tax impacts. You need to conduct careful planning in dealing with two countries’ tax systems.
CDH provides tax return preparation and tax consulting services for cross-border individuals living in the United States or foreign countries and strives every day to solve and explain various problems and questions of these people. In addition, the issues these people face are complex and wide-ranging, including the tax laws of your country and the United States, immigration law, life insurance, and retirement rules. This article makes complex tax laws and regulations easy to understand, which is just the point. Therefore, there are many exceptions. There is also a risk that the rules have already changed by reading them. Please contact us from the following website for the latest practices. Also, consult with tax and legal affairs experts if you take action.
CDH Resources: www.cdhcpa.com. We provide one-hour paid consultation sessions online. https://outlook.office365.com/owa/calendar/[email protected]/bookings/ If you can read Japanese, visit https://www.cdhcpa.com/ja/cross-border-individual-tax/. You can access them all on the page. YouTube, Facebook, free online consultations, estate, permanent resident waiver, exit tax, Form 1040, tax simulation, overseas asset reporting, other sectoral online question forms, and monthly newsletter sign-ups. For more information-packed past articles, check out https://www.cdhcpa.com/ja/news/. Please feel free to use it. You can email me at [email protected]