Tax is usually not the first thing that comes to mind when one decides to change his immigration status. However, one should not take this matter lightly as there may be significant tax implications in the type of U.S. visa one acquires. The Wolf Group has worked with many immigration attorneys over the years and we understand the tax challenges faced by their clients. Here are some top tax issues that clients and their immigration attorneys may not be aware of:
- Did you know that a green card holder’s U.S. income tax residency may not start on the date his/her green card is approved by the USCIS?
Your U.S. income tax residency starting date may either be before or after the date the green card is approved.
A person’s U.S. income tax residency start date under the “green card test” is the first day of presence in the United States with an approved green card. You may be able to delay becoming a U.S. tax resident by simply not coming to the United States for a period of time after receiving your green card and therefore may be able to perform some income tax planning before becoming a U.S. tax resident.
You may also become a U.S. income tax resident prior to receiving your green card if you meet the so-called “substantial presence test.” This test is based on a formula that counts the number of days of presence in the United States over a three year period (See Q&A #5 below for the specific rules). If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day of presence in the United States during that calendar year. If you meet both the green card test and the substantial presence test in the same year, your residency start date is the earliest residency start date of the two tests.
- Did you know that a green card holder may file a nonresident income tax return in certain situations?
Green card holders (GCHs) are treated as U.S. income tax residents and therefore are required to file U.S. resident income tax returns (Forms 1040) to report their worldwide income.
However, if you have a green card and at the same time are also treated as a tax resident of a foreign country that has an income tax treaty with the United States, you may be able to invoke the treaty “tie-breaker” rules and file as a nonresident of the United States. Treaty tie-breaker rules usually base tax residency determination on a number of factors, including where the taxpayer has a permanent home, where the taxpayer has his/her center of vital interest, or where the taxpayer has a habitual abode, etc.
Warning: Filing as a nonresident may cause a green card holder to trigger the U.S. “Exit Tax” (see #4 below). Also, we have been told by immigration attorneys that a green card holder filing as a U.S. nonresident may jeopardize his/her green card. Therefore, it is strongly suggested that you speak with your immigration counsel before considering filing U.S. taxes as a nonresident.
Although taking a treaty tie breaker position to be a nonresident may be problematic from a U.S. Exit Tax and immigration perspective, it should nevertheless sometimes be considered where a client may save tens or even hundreds of thousands of tax dollars.
- Did you know that at the expiration of a green card, a person’s U.S. income tax residency continues?
A GCH will remain a U.S. income tax resident if his/her immigration status has not been revoked and has not been administratively or judicially determined to be abandoned. If your green card has simply expired, you will remain a U.S. income tax resident, subject to full worldwide U.S. income tax and U.S. informational filings.
- Did you know that there are circumstances when it is prudent to obtain a nonimmigrant visa rather than a green card in order to avoid the so-called U.S. “Exit Tax”?
It may be prudent to consider obtaining a nonimmigrant visa instead of a green card due to the potentially harsh U.S. tax consequences of thereafter abandoning your green card.
Individuals who have abandoned or otherwise judicially or administratively lost their lawful permanent resident status may be subject to the so-called Exit Tax. Generally, an individual who ceases to be a green card holder after having held a green card in at least 8 of the last 15 tax years may be subject to the Exit Tax if any of the following conditions are met: (Note that the Exit Tax does not apply to individuals who are not U.S. citizens or green card holders regardless of the number of years they have been U.S. income tax residents.)
- The person’s average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than $160,000 (indexed for inflation) if he/she expatriated or terminated residency in 2015.
- The individual’s net worth is $2 million or more on the date of expatriation.
- The person fails to certify on Form 8854 that he/she has complied with all U.S. federal tax obligations for the 5 years preceding the date of expatriation or termination of residency.
If any of the above conditions are met, you may trigger the Exit Tax and for U.S. income tax purposes all of your worldwide property will be deemed sold for its fair market value on the day before your expatriation date. For 2015, the net gain from the deemed sale above $690,000 (indexed for inflation) is subject to U.S. income tax. In addition, certain tax deferred accounts are deemed liquidated and the present value of certain foreign pensions are subject to immediate taxation. Therefore, carefully consider whether you would be better off with a nonimmigrant visa.
- Did you know that E or L visa holders may want to limit their time in the United States to less than approximately 120 days per year in order to avoid being U.S. income tax residents?
U.S. income tax nonresidents are taxable only on their U.S. source income, whereas U.S. income tax residents are taxable on their worldwide income. You may be considered a U.S. income tax resident if you meet either the green card test or the substantial presence test. The substantial presence test is based on physical presence in the U.S.:
- 31 days during the current year, and
- 183 days under a formula during the 3-year period that includes the current year and the prior 2 years. To determine whether the person has met the test, count all the days of presence in the current year, 1/3 of the days of presence in the prior year, and 1/6 of the days of presence in the second prior year. If these numbers add up to 183 days or more then the person (in general) would be an income tax resident for the current year. (Note that days in the United States by full-time employees of International Organizations are not counted for purposes of the substantial presence test).
It turns out that under the above formula, you can be in the U.S. an average of about 120 days each year without meeting the substantial presence test of income tax residency.
- Did you know that a nonresident can often avoid U.S. capital gains tax on the entire appreciation of his/her investment portfolio by selling those securities and reinvesting in the same securities before becoming a U.S. resident?
U.S. income tax nonresidents are subject to U.S. tax on income from U.S. sources. Income from the sale or exchange of securities (e.g. stocks, bonds, mutual funds, etc.) by a nonresident is in most cases not considered U.S. source income and is therefore tax-exempt. A U.S. tax resident on the other hand is subject to tax on his/her worldwide income, including any gains arising from the sale of securities. A tax planning opportunity may exist for nonresidents who are about to come to the United States; with the help of a tax advisor they should consider selling their appreciated securities and immediately buying them back in order to receive a stepped-up tax basis for U.S. purposes.
Special Rule for G-4 visa holders: Capital gains from the sale of personal property, including securities (i.e. stocks, bonds, mutual funds, etc.) is deemed to be sourced to the United States if the nonresident has his/her “tax home” in the U.S. and is present in the U.S. 183 days or more during the calendar year. Generally, G-4 visa holders who work and live in the United States are considered to have a “tax home” in the United States. The 183 days of physical presence for this test includes all days of physical presence in the U.S. even if the person is a full-time employee of an international organization. In other words, this 183 day rule is different from that of the substantial presence test, and does not have a similar exception for so-called “exempt individuals.” Therefore, those nonresidents who work for international organizations in the U.S. and spend more than 183 days in the U.S. during the calendar year are generally subject to U.S. taxation on their worldwide sale of securities at a flat 30% tax rate. Nonresidents who are subject to capital gains tax on the sale of securities should file a nonresident income tax return on Form 1040NR (“U.S. Nonresident Alien Tax Return”) in order to report this income.
- Did you know that a nonresident with U.S. rental property should ALWAYS claim “depreciation” expense and always file a U.S. income tax return to “carry forward” losses reported on the rental properties?
U.S. gross rental income received by U.S. income tax nonresidents is subject to a flat 30% tax rate.
Nonresidents, however, may make the so-called “net election” in order to be able to take deductions against their gross rental income in order that their net rental income is taxed at U.S. progressive rates of tax. Once this election is made, expenses such as mortgage interest, real property taxes, maintenance, repairs and depreciation may then be deducted and any losses incurred from the rental may be carried forward.
A nonresident that receives any gross U.S. rental income must file a U.S. tax return (Form 1040NR) and once the “net election” is made, should always take depreciation as an expense item on his/her tax return. The reason for this is that the law imposes an “allowed or allowable” rule that provides that even where depreciation is not taken on an income tax return, the rental property’s tax basis is always reduced by the otherwise allowable depreciation. Therefore, the ultimate gain or loss from the sale of the property is always calculated assuming depreciation had been taken which accordingly reduces the tax basis of the property.