The Tax Implications of Foreign Income if You Are a U.S. Green Card Holder
If you have been issued a U.S. green card you are currently a tax resident of the U.S. beginning the year you were issued the card. That means you are required to report all of your income to the IRS, regardless of whether it was earned in the U.S. or abroad.
The good news for many U.S. green card holders is that they are living and working in the U.S. on a full-time basis and not earning foreign income, so they will only need to worry about filing their taxes in the U.S. That is because, unlike the U.S., most countries only require individuals to pay tax if they are either living or working there.
The number of days a green card holder spends in the United States has no impact on their status as a U.S. tax resident, so green card holders who spend most (or all) of their time outside of the United States will still need to file returns showing their worldwide income with the IRS. There are rules that bar the IRS from collecting tax on some individuals with non-immigrant visas if they spend a limited amount of time in the U.S., but those rules do not apply to green card holders.
Tax Treaties May Not Help Much with U.S. Taxes
The U.S. currently has income tax treaties with 58 other countries. So if a green card holder earns income in a country with which the U.S. has a tax treaty, the treatment of that foreign income may be subject to the terms of the treaty. If the income is earned in a non-treaty country, it will all be treated as income by the IRS.
Unfortunately, while there may be a tax treaty in force between the U.S. and the country where the green card holder earned income, it may not be of much help in reducing the green card holder’s federal income tax obligations. That is because most income tax treaties operate by reducing the tax owed in the country where the taxpayer earned income, but is not a resident. Therefore, the U.S. tax treaties primarily benefit U.S. citizens and residents working abroad.
The IRS puts it more bluntly when explaining tax treaties: “With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or U.S. treaty residents.”
However, the news is not all bad for green card holders. If you are a green card holder and have earned income in a country that has a tax treaty with the U.S. there is a good chance you will receive some tax relief there. Additionally, some treaties assign certain income to one of the two signatory countries, so that income will be taxed in one of the countries, but not both.
The U.S. has negotiated a number of special rules in some of its tax treaties, so if you have foreign income from a signatory country, it is best to consult with a tax professional to get a better understanding of how those provisions might affect you.
Foreign Assets Must Also be Reported by Green Card Holders
The U.S. enacted the Foreign Account Tax Compliance Act (FATCA) in 2010 that requires all U.S. taxpayers holding financial assets of more than $50,000 outside the U.S. to report those assets to the IRS on a Form 8938. The FATCA attempts to keep those taxpayers honest by requiring foreign financial institutions to report certain information on accounts held by U.S. taxpayers directly to the IRS.
Green card holders are also required to file an annual Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury Department. A green card holders need to file an FBAR when they have an interest in at least one financial account outside the U.S. and the aggregate value of all of the accounts is more than $10,000.
The penalty for not reporting foreign assets of more than $50,000 under FATCA can be up to $10,000. If a green card holder continues to report those assets after being notified by the IRS the penalty may increase to up to $50,000. The IRS also has the option of imposing a 40% penalty on any tax understatement that is the result of failing to disclose assets under FATCA.
The penalties for FBAR non-compliance can also be harsh. A non-willful FBAR violation can lead to a maximum of $12,921 in penalties, while willful violations can lead to a penalty that is the greater of $129,210 or 50% of the unreported amount.
False Returns May Lead to Green Card Being Revoked
In 2012 the U.S. Supreme Court issued a ruling stating that a green card holder who knowingly filed a false income tax return, aided in the filing of a false return or failed to file an FBAR is subject to deportation and criminal prosecution. The case, Kawashima v. Holder, involved a husband and wife who pleaded guilty to filing a false tax return without understanding that it could lead to their deportation.
Green card holders who have spent more than eight years in the U.S. and are deported may also be subject to the expatriation tax, which is imposed on certain high-net-worth taxpayers who revoke their citizenship or cease being U.S. tax residents. The rules for the tax are complex, but it essentially imposes a tax on the gain on the taxpayer’s U.S. property.
A green card holder who fails to file a return, or claims non-resident tax treatment under a tax treaty, could also be found to be intending to abandon his or her permanent residence status. That is also grounds for revoking your green card.
States Not Required to Recognize Tax Treaties
Many states, including California, do not recognize U.S. income tax treaties and green card holders should probably consult with a tax professional in your state on how to declare foreign income on their state returns.
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This post was written by Sean Allaband