Getting Rid of the Green Card

When you receive the visa status of "permanent resident" -- the green card visa -- that status will continue until the visa status is formally terminated. Visa status is formally terminated by paperwork.

The paperwork can start on either side. You can start the process to terminate your visa status as a permanent resident of the United States. This is done with Form I-407, and this is referred to as abandoning permanent resident status. Or, the government can start the process to terminate your visa status. This is called revoking your visa. The important point is the impact on your tax return filing requirements in the United States. Once you have a green card, you must file income tax returns in the United States, no matter where you live. This tax return filing requirement continues until, as I said, the formal paperwork is completed by which your green card is revoked or abandoned.

Long-Term Resident or Not

Are you a Long-Term Resident of the United States or not? And what are the implications of that status?

There are three things that matter when you are trying to figure out if you are a Long-Term Resident (or not):

• The calendar year in which your green card was issued;


• The calendar year in which you filed the Form I-407; and


• Whether you filed Form 8833 and claimed nonresident status in the United States under an income tax treaty.

For you to figure out the answer for yourself, look at the number of calendar years starting with the year you received a green card, and ending with 2014, the year you will file the Form I-407. Is this total more than eight?

I am going to assume you never filed as a nonresident of the United States on Form 1040NR, with Form 8833 attached to it to make a claim that you were a nonresident of the United States under the income tax treaty between the USA and the country you live in.

Simple math: if you received your green card in 2007 or earlier, and you never filed a U.S. tax return as a resident, you are a Long-Term Resident.

Is Short Term Better?

Avoiding Long-Term Resident status is a good thing because you completely avoid all of the expatriation tax rules. You do not have to file Form 8854. You don't risk covered expatriate status (and a big tax bill) if you have a tax paperwork problem for prior years. You should attempt to avoid Long-Term Resident status if you can.

There is only one way to do this: somehow find enough years in the past for which you can file income tax returns claiming nonresident status under an income tax treaty between your home country and the United States. These years don't count.

Suggestion: if you are in the process of preparing tax returns for 2010, 2011, and 2012 why not see if you can file these as Form 1040NR and make the treaty election on Form 8833 to be a nonresident of the United States for income tax purposes? This may bring the total number of years below eight, making you NOT a Long Term Resident, and (hooray) eliminating the Form 8854 mess that you would otherwise need to do for 2014.

Caution

Caution: don't arbitrarily make the treaty election to be a nonresident of the United States until you have thoroughly checked it out.

Here's why. If you make the treaty election AND you have at least eight years of tax status as a resident in place already, the treaty election to be a nonresident of the United States will itself be an expatriation event and will subject you to the exit tax.

Here's an example. I said in my suggestion above that you might consider making the treaty election and filing Form 1040NR for 2010, 2011, and 2012. This might end up with the result that you are treated as expatriating in 2010. If that happens, then you are of course late with filing Form 8854. That means you fail the certification test because you didn't file Form 8854 on time. And that, in turn, means you are a covered expatriate and might face large U.S. income tax problems.

Electing to be a nonresident of the United States for income tax purposes, then, can be good or it can be bad. It can prevent you from being a Long-Term Resident. (That's good, because if you are not a Long-Term Resident, you are not subjected to the exit tax rules). Or the election to be a nonresident can be treated as having no effect on your status as a Long-Term Resident, and instead the election will be treated as an expatriation event in exactly the same way as your filing of Form I-407.

Treaty Elections To Achieve Nonresident Status

The question of "when am I a Long-Term Resident?" is vitally important to green card holders. But figuring out the interaction with the rules for electing nonresident status using a treaty? There is only one word to describe it: brain damaged. Let's make some sense of it.

First, the whole idea of a treaty election--let's talk about what this means. There are in fact two sets of tax laws in the United States. One set is enshrined in that massive bag of doorknobs that we call the Internal Revenue Code. These are the normal tax laws that apply to everyone.

The second set of tax laws are found in bilateral tax treaties. These are diplomatic agreements between the United States (on one side) and another country (on the other). Hence, "bilateral". There are many dozens of these. They are one-off, negotiated one at a time by bureaucrats and diplomats on both sides. These treaties apply only to residents of the United States (on one side) and residents of the other country (on the other).

These treaties are designed to make the tax systems of the two countries a bit more friendly to residents of the two countries -- to eliminate double taxation of income, for instance.

One of the difficulties people have is being potentially taxable in two countries at the same time. If you are a resident of two countries for income tax purposes, well, Bad Things Might Happen. Your wallet might suffer. One way to solve this is built into every income tax treaty I have ever seen. It is usually in Article 4. This provision says "If a person can be treated as a resident of both countries for income tax purposes, here is the way we will break the deadlock so the person can be assured that he/she is a resident of one country for income tax purposes and a nonresident of the other country."

Green card holders are treated as residents of the United States for income tax purposes, taxable on their worldwide income. It doesn't matter that the green card holder is actually living outside the United States, and has lived outside the United States for decades. U.S. tax law is clear: if you have a green card, you pay tax on worldwide income.

A green card holder living in another country will probably also meet the definition of being a "resident" of that country for income tax purposes. Under U.S. law and the domestic tax law of the other country, then, the green card holder will be a resident. Both countries want a slice of the green card holder's pie. So to speak.

So how does the income tax treaty help? Think of it like a trump card that the taxpayer can use. The government cannot force a taxpayer to use the alternate tax law that is embedded in the income tax treaty. Only the taxpayer can choose to use the treaty to define his/her tax reality. In this case, the green card holder wants to overrule the Internal Revenue Code's definition of "Who is a resident taxpayer?" with the income tax treaty's definition.

This converts the green card holder from having to pay U.S. income tax on all income earned worldwide, to just having to pay U.S. income tax on income earned in the United States. For example, a green card holder living in the U.K. would--by making the election under the income tax treaty, be taxed as a resident of the U.K. for income tax purposes, and a nonresident of the United States. The way this is done is by filing a U.S. tax return. Not surprisingly, the IRS has a form to use--Form 8833.

Treaty Elections and Long-Term Resident Status

With that in mind, let's now turn to the intersection of income tax treaty elections and the exit tax.

The definition of a Long-Term Resident is at Internal Revenue Code Section 877(e)(2):

For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in subparagraph (A) or (B) of paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.

There are two parts to this definition. First, you must be a lawful permanent resident (i.e., a green card holder) in at least 8 of the last 15 years--including the year that the green card visa is revoked or abandoned.

Example

I receive a green card in 2013. I file Form I-407 and abandon the green card in 2014. For both years, I file Form 1040 for my income tax return. I was a lawful permanent resident in two of the last 15 years, including the year I gave up the green card. I am not a "Long-Term Resident".

Example

I receive a green card in 2003. I file Form I-407 in 2014 and abandon my green card. I was a lawful permanent resident in 12 of the last 15 years, including the year I gave up the green card. I am a "Long-Term Resident."

The second part of the definition says that you are not a "lawful permanent resident" if you are treated as a resident of a foreign country under the provisions of a tax treaty, and you don't waive the benefits of the treaty. This is the important part . We need this in order to compute the number of years of lawful permanent resident status. If the number of years adds up to an amount fewer than 8 out of 15, then the person is not a Long-Term Resident, and the exit tax rules will not apply.

Example

I receive a green card in 2013. I file Form I-407 and abandon the green card in 2014. In 2013, my first year of holding the green card, I file Form 8833 attached to a Form 1040NR income tax return and claim nonresident status for the entire year. In 2014, I do not make the treaty election to be a nonresident of the United States, so I am a full-fledged lawful permanent resident for at least part of the year--until I file Form I-407 to abandon the green card. I was a lawful permanent resident in one of the last 15 years, including the year I gave up the green card. I am not a "Long-Term Resident".

Example

I receive a green card in 2003. I file Form I-407 in 2014 and abandon my green card. In 2003 and 2004, I lived in the United States and filed resident income tax returns using Form 1040. In 2005 I moved back to my home country and started filing Form 1040NR and claimed nonresident status under the treaty between the United States and my home country. This continued every year from 2005 through 2014, when I filed Form I-407. I was a lawful permanent resident in 2 of the last 15 years (2003 and 2004 only), including the year I gave up the green card. I am not a "Long-Term Resident."

What this tells us is that an adroit use of the tax treaty election can be a green card holder's friend--it can prevent the exit tax from applying to him because he never becomes a Long-Term Resident. And only Long-Term Residents (well, and U.S. citizens too) are subjected to the exit tax. Why wouldn't a green card holder reflexively make the treaty election? Simple, really. It might be smart for tax purposes but the Immigration Boffins in Washington DC will take a look at the tax treaty election and take this as evidence that you don't want to live in the United States anymore. You risk losing your green card--the government might take it away.

Why Treaty Elections Cause Accidental Expatriation

Everything up to now has been pretty simple. It's just a math problem--do you match the "8 out of 15" test, when treaty election years don't count?

But now we get to the "bag of doorknobs" aspect of the tax law: the time when making the treaty election in fact causes you to expatriate for tax purposes. We are at the situation where the U.S. Citizenship and Immigration Services people think you are a resident of the United States but the Internal Revenue Service says you're not.

Start with the idea that the exit tax rules only apply to "expatriates". In the case of green card holders, this means, according to Internal Revenue Code Section 877A(g)(2)(B):

any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).

Thus, a green card holder who is a Long-Term Resident (and ceases to be be a lawful permanent resident) is an expatriate. A green card holder who is NOT a long-term resident (and ceases to be a lawful permanent resident) cannot be an expatriate. This is why it is so important for people to consider using the income tax treaty election to avoid hitting that magic "8 out of 15 years" mark for being a lawful permanent resident: it defeats any possibility of him becoming subjected to the exit tax rules. That means no tax risk, no Form 8854, no nothing. Just file your final tax returns and get out.

Once you have hit that magic status of being a Long-Term Resident, however, and you cease to be a lawful permanent resident (and you do this according to the rules of Internal Revenue Code Section 7701(b)(6)), then you are an expatriate.

Once again:

• If you are not a Long-Term Resident and you cease being a lawful permanent resident according to the rules in Internal Revenue Code 7701(b)(6), you are safe. You are not an expatriate, and the exit tax rules only apply to people who are expatriates.


• If you are a Long-Term Resident and you cease being being a lawful permanent resident according to the rules in Internal Revenue Code Section 7701(b)(6), you are stuffed. You are an expatriate, and the exit tax rules apply to you.

Evidently, the magic lies in this "Internal Revenue Code Section 7701(b)(6)" thing I keep referring to. Here is what it says:

For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—

(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and

(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).

An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.

This shows us the two ways to stop being a lawful permanent resident. The first is obvious: get lawful permanent resident status (the "(A)" part) and don't have it revoked or abandoned (the "(B)" part).

The second is that ugly paragraph of text below the (B) stuff. Tax lawyers call this "flush language" because it is aligned with the left margin, with no numbers or letters in front of it. The flush language is the Congressional way of saying that you claimed the benefits of an income tax treaty to be a nonresident of the United States for income tax purposes.

Let's now put it all together and see how making the income tax treaty election to be a nonresident of the United States is useful for exit tax purposes (to prevent you from being an "expatriate") or dangerous for exit tax purposes (because it makes you an "expatriate").

If you make an election under an income tax treaty to be a nonresident of the United States for income tax purposes BEFORE you have achieved that magic "8 of the last 15 years" marker, then there is no adverse exit tax impact. You haven't achieved the status of "expatriate". You ceased to be a lawful permanent resident (as defined in Internal Revenue Code Section 7701(b)(6)) but you weren't a Long-Term Resident at the time, so you are safe.

If you make an election under an income tax treaty to be a nonresident of the United States AFTER you have achieved that magic "8 of the the last 15 years", you will have ceased to be a lawful permanent resident as defined in Internal Revenue Code Section 7701(b)(6), and you did this while you were a Long-Term Resident. Therefore you will be an expatriate as defined in Internal Revenue Code Section 877(e)(2), and you will be subjected to the exit tax rules.

Conclusion

Playing with fire when you make the treaty election to be a nonresident for U.S. income tax purposes, you are. Use it wisely and with forethought.
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