Questions to Ask When You Give Up Your Green Card
Depending on how long you had your Green Card, IRS may surprise you with additional requirements when you decide to give up on your US citizenship. Being a green card holder means you have the same tax requirements as any other citizens of the USA.
Even if you have surrendered your Green Card with the immigration, you might need to submit these additional requirements. Otherwise, you will remain a US taxpayer.
What kind of residency do I have according to how long I held my Green Card?
You have to understand two terms and time timetable to determine whether you are still liable as a US taxpayer. The following terms are dependent on when you have given up your green card:
1. The day when you received your green card, you became a lawful permanent resident.
2. When you hold your green card for 8 years or more, you are considered a long-term resident.
What are the forms that I have to accomplish?
If you fall under the long-term resident after holding your green card for 8 years or more, you will have to file form 8854. After renouncing your green card, you will file your final tax return including form 8854.
This form certifies that you have filed your taxes and paid your tax dues in the last five years. If you must file form 8854, you will stay as a US citizen until you file it. It is then important to file it at once. It’s not a good deal for you to still file tax returns and pay taxes without the benefits of being a green card holder.
How do I determine my final tax return?
For you to better understand how to determine your final tax return, let’s consider an example. Let’s say renounced your citizenship last October 15, 2017. You will need to file a tax return for the year 2017. In this case, you will have to file a dual-status tax return.
For your dual status, you will need to file two forms – form 1040 and form 1040 NR.
In form 1040, as a US citizen, you will have to file your worldwide income from January 1 to October 15, 2017. From the date of your renunciation up to the end of the year (October 15 to December 31, 2017), you will have to file a non-resident form 1040.
A different scenario happens once you give up your green card compared to renouncing your citizenship. You can choose between filing a dual-status tax return or you can choose to be considered as a US citizen for the entire tax year (2017). Although you have given up your green card on October 15, you can choose to file only form 1040 where you declare your worldwide income for the whole year.
You can even maximize your tax benefits in this scenario. Consult your tax adviser for the best option that is ideal for you.
How do I know if I still have to pay an exit tax?
You must first determine if you are a covered expatriate or not. Only a covered expatriate needs to pay an exit tax. With the same idea as renouncing your citizenship, your tax calculations assume that you have already sold all your assets on the day before you gave up your green card.
There are three factors determining your tax liabilities if you are a covered expatriate. The first two are related to your net worth and the third one is your compliance.
First, if your net worth reaches USD 2 million, you must pay an exit tax. All of your worldwide assets are included in this amount. If you are married this is your net worth when filed separately. If you are filing jointly, the amount increases to 4 million.
What if your net worth does not reach 2 million, will you still pay an exit tax? The second determinant would be your income tax liability.
Even without reaching 2 million, once your income tax liability in the previous five years reaches $161k annually, you are considered a covered expat. Plan ahead if you are already on the edge of this limit.
For instance, 161K multiply to 5 years gives 805k of tax liability. If you have an income tax liability of 200k annually in the past 4 years, you better stop working. Your total tax liability is already 800k and having a year off would eventually help you save money as you avoid exit tax.
Remember that your tax liability is taken directly from your tax return. It is better to file your taxes separately if you plan to expatriate. This will help reduce your average tax liability for form 8854. The average net income tax liability for 5 years before the date of expiration has also increased as the year progresses. In 2008, the tax liability was only 139K, now it is up to 161k.
The third determinant if you have to pay an exit tax is your compliance in filing your tax returns. If you have not filed form 8854, you may automatically become a covered expatriate. You are then required to pay an exit tax. You can still avail of other creative solutions once you renounced your green card in the previous year.