Green Card Exit Tax: What is the 8-Year Abandonment Rule?

Green Card Exit Tax

Green Card Exit Tax 8 Years

Green Card Exit Tax 8 Years & Tax Implications at Surrender: The IRS Green Card Exit Tax 8 Years rules involving U.S. Legal Permanent Residents is complex. The general proposition is that when a U.S. citizen renounces citizenship and relinquishes their U.S. status, they are subject to the expatriation and exit tax rules. But, the rules are not limited to U.S. citizens. If a Green Card Holder has been a permanent resident for at least 8 of the past 15 years, they become subject to expatriation tax laws as well. In fact, it does not even require that the green card holder was a permanent resident for the full 8-years — or that they resided within the U.S.

The Green Card Exit Tax 8 Years analysis is comprehensive. Oftentimes, it comes as a surprise and shock to Green Card Holders that they too may be subject to covered expatriate and U.S. exit tax rules.

Let’s review the basics:

Green Card Status & Exit Tax at Expatriation 

If a person is not a U.S. citizen, they may still be subject to the expatriation tax laws if they:

• • • Are a Permanent Resident; and

    • Are considered a Long-Term Permanent Resident (aka Long-Term Resident)

Conversely, if the person is not a citizen or permanent resident, they are not subject to U.S. exit tax. For example, even if the expat had resided in the U.S. for 25-years but was neither a U.S. citizen nor Legal Permanent Resident, then that person would not qualify as a Long-Term Resident merely because they resided in the U.S.

What is a Long-Term Resident (LTR)?

A Long-Term resident is a permanent resident (not a mere visa holder) who qualifies as a permanent resident for 8 of the last 15 years. That does not mean the permanent resident had to reside in the U.S. during that time – they do not. Rather, if the person merely has the status of a legal permanent resident, that is all that is required.

As provided by the IRS:

• • • You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends.

    • In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.

    • You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant.

    • You generally have this status if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t commenced to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country.

    • You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.

    • If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be treated as having expatriated as of that date.

When Does Legal Permanent Residency Expire?

As further provided by the IRS:

• • • If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.

      • • The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.

        • The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).

        • The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.

        • If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment on a Form 8833 attached to a timely filed income tax return.

        • See Regulations section 301.7701(b)-7 for information on other filing requirements if you are such an individual.

What if my Green Card Expired Several Years Ago?

Just because the green-card expires does not mean the person has relinquished their permanent resident status, absent additional action taken by the green card holder. In other words, a green card holder must voluntarily abandon their green card. Otherwise, simply because a person’s green card expires does not mean their U.S. status expired.  The green card is used to represent that a person has gained legal permanent resident status. Conversely, if a legal permanent resident loses or misplaces his or green card, that does not mean that the person has lost their permanent resident status.

Let’s go through the abandonment basics:

Green Card Status

You have been given the privilege, according to U.S. immigration laws, Residing permanently in the United States as an immigrant.

As provided by the IRS, you generally have this status if you have been issued an alien registration card, also known as a “green card,”

What does this Mean?

It means that for all intents and purposes, a person is considered a Lawful Permanent Resident when they have been given the privilege of residing in the United states with a Green Card. Notice, it does not require the taxpayer to actually reside in the United States — but rather just being granted the privilege to do so.

Not Revoked or Abandoned

Your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and

A person is still considered to have the privilege of residing in the United States permanently until their Green Card has been revoked or judicially or administratively abandoned.

Important to note is that merely having the green card expire is not sufficient.

Why?

Just because the Green Card expires does not prevent the Taxpayer from going back and trying to re-up the Green Card after it has expired. In other words, to prove abandonment a person has to take an affirmative step — and the path of least resistance for most LTRs will be to file Form I-407.

Waived Foreign Treaty Benefits & 8833

• • • 1) commenced to be treated as a resident of a foreign country under the provisions of a tax treaty

    • 2) waived the benefits of such treaty, and

    • 3) notified the IRS of such a position on a Form 8833 attached to an income tax return.

These three elements — when taken together — provide that as long as the Taxpayer still has the Green Card and it has not been judicially or otherwise properly revoked or abandoned, then they will still be considered to be a Lawful Permanent Resident — with those years counting toward Long-Term Resident status — unless they proactively:

• commence to be treated as a foreign resident
• under a tax treaty
• Waived benefits of the treaty; AND
• Notified the IRS on Form 8833

Can I Just Reside in a Treaty Country as Abandonment?

Generally, the answer is — No. Just residing in a treaty country is not sufficient to avoid green card status under the IRS requirements. In other words, in order for the Taxpayer to avoid being treated as a US person in any one of the eight (8) of the last 15 years, they can’t just live in a Treaty Country. Instead, they would take the position under the Treaty that they are a Foreign Resident and file form 8833 — which the IRS requires to be submitted to show reliance on the treaty.

Can Residing in A Treaty Country Ever be Sufficient?

If a taxpayer has resided overseas for many years, their Green Card expired — and they have not ever returned to the United States or have any communications, investments, etc with the United States, then they can try to take the position that they are by default a non-resident — but it will presumably require litigating against the IRS. Thus, the taxpayer will be in for a long and costly dogfight with the IRS — along with having to carefully evaluate the 8854 — which is signed under Penalty of Perjury. 

Thus, it is better when possible to try to plan from the outset to avoid these unnecessary costs. Otherwise, it will put the Taxpayer into a precarious tax position – which could result in hundreds of thousands and even millions of dollars of exit tax.

Form 8833 Tax Trap with Abandonment of US Green Card

• • • “If you were already an LTR at the time you cease to be treated as a lawful permanent resident, then you will be treated as having expatriated as of that date.”

This is very important language, because it warns the taxpayer that if they already meet the eight out of 15 years requirement and then they go ahead and file the form 8833 for the current year (and possibly prior years) — then that act will be considered the expatriating act, which cannot be unwound.

The reason it is crucial is because it would not leave the taxpayer with any ability to plan for the exit tax before performing the expatriating act.

When is a Long-Term Resident a Covered Expatriate?

Next, U.S. citizens and long-term resident have to determine whether they meet the test to be a covered expatriate. When a person is considered a “covered expatriate,” they may become subject to exit tax depending on the outcome of the calculation.

There are 3 main ways a person meets the covered expatriate test.

Average Tax Liability Test

Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.

• • • $139,000 for 2008.

    • $145,000 for 2009.

    • $145,000 for 2010.

    • $147,000 for 2011.

    • $151,000 for 2012.

    • $155,000 for 2013.

    • $157,000 for 2014.

    • $160,000 for 2015.

    • $161,000 for 2016.

    • $162,000 for 2017.

    • $165,000 for 2018.

    • $168,000 for 2019.

    • $171,000 for 2020.

Net Worth Test

Your net worth was $2 million or more on the date of your expatriation.

5-Year Tax Compliance

You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.

Green Card Exit Tax & Covered Expatriates

When a person is a Covered Expatriate, they may have to pay an “exit tax,” in addition to an ongoing (annual) filing requirement of form 8854 (even after they relinquished their status).

Exceptions

Even if the expatriate is a permanent resident and qualifies as a Long-Term Resident, there are still exceptions to becoming a covered expatriate:

Dual-Citizens and Certain Minors

As provided by the IRS:

• • • Dual-citizens and certain minors (defined next) won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) above (under Covered expatriate) applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) (under Covered expatriate, earlier).

Certain Dual-Citizens

• • • You can qualify for the exception described above if you meet both of the following requirements.

    • You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.

    • You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

Certain Minors

• • • You can qualify for the exception described above if you meet both of the following requirements.

      • You expatriated before you were 181/2.
      • You were a resident of the United States for not more than 10 tax years before the expatriation occurs.

    • For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

What are Green Card Exit Tax Implications?

The tax implications fall under Section 877A, which requires the filing for Form 8854 — and potentially an ongoing filing requirement if tax was delayed or situations in which a bond was posted or the covered expatriate still have certain US investments/pension.

Are You a Green Card Holder Interested in Expatriation from the U.S.?

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