Every year almost half a million people obtain Green Cards (“GC”). When you become a GC holder, you have basically the same obligations that US citizens have.  US tax laws are complex and hard to understand. If you are a GC holder, understanding the US tax laws is a big challenge. Therefore, I will explain 5 things that you must know as a GC holder.

  1. Foreign Financial Assets reporting requirement

If you are a GC holder, you are subject to the US tax for your worldwide income. In addition, you are required to report your foreign financial assets (bank accounts, investment accounts, etc.) if the total value of such assets exceeds $10,000 at any time of the year. You report this information through a form called Foreign Bank Account Report (“FBAR”). If you fail to report, there can be a very serious tax penalty.

  1. Inheritance or gifts must be reported

Though your parents may not be residents of the US, if you receive a gift or inheritance from a nonresident, you must report the receipt if the value exceeds $100,000 when you file your US income tax returns. Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is used to report this information, and it must be sent to a different address than your income tax returns. The penalty is $10,000 or 35% of the value of the gift/inheritance – whichever number is bigger.

  1. You must inform IRS when you give up your GC

A GC holder continues to be a US resident for US tax purposes until you notify the IRS that you give up your GC. If you do not file this form, you are still subject to US taxes on your worldwide income. When you are ready to turn in your GC, you first must file Form I-407, Record of Abandonment of Lawful Permanent Resident Status. Then, you will file Form 8854, Initial and Annual Expatriation Statement, with your final US tax returns. This will officially end your US residency status for any tax purposes. Failure to file Form 8854 is subject to a penalty of $10,000.

  1. US Exit Tax

If you meet certain criteria when you give up your GC card, you may be subject to a so-called “exit tax,” also known as “expatriation tax.” One of the key criteria is if you have held a GC for more than 8 years within the last 15 years.

Exit taxes are relevant because some “taxable income” such as capital gains on home ownership is not taxed until you dispose of the asset.  Asset disposal may only occur decades after you’ve permanently left the US while some of the capital gains occurred while you are a US tax resident. Once you fully leave US jurisdiction the US can no longer pursue you for taxes, which is why the US government may require an exit tax filing.

The other is that your net worldwide assets is over $2 million. Please note that the $2 million limit is not for the entire household. You and your wife may separately pay exit taxes.

  1. Your investment account and 401(k)

The last point is not really tax related. But, it is important enough to mention. As far as I know, all investment brokerage companies do not allow non-residents to hold an investment account. Your investment account, traditional IRA, Roth IRA, and/or 401(k) balance(s) may have to be liquidated when you give up your GC. There can be serious consequences if you are not ready to liquidate these accounts. A premature withdrawal from a traditional IRA or 401(k) account means a 10% penalty in addition to ordinary tax rates imposed on the entire investment.

At CDH, we are very skilled at handling a wide variety of tax issues that GC holders encounter. Please email me if you have any questions. Please note that the above article is a general summary of rules and related matters. I advise you to consult us regarding any individual matter as the rules are very complex and cannot be easily summarized in one article.