When a foreign individual commences “residency” in the United States for US Income Tax purposes, this date, the Residency Starting Date (RSD), will mark the official date he begins to be taxed on his worldwide income and becomes responsible for various tax information reporting (such as FBAR, Form 5471, Form 8938, to name a few). Commencing on this date, the individual will be treated in the same manner for US tax purposes as the US citizen.
An alien individual’s period of residency in the United States must have not only an official starting date, the RSD, it must also have an official ending, or “residency termination date”. This blog post will focus only on the RSD.
While it sounds simple, the RSD rules are full of details and as readers of my blog know, the devil is always lurking in the details. Many of my clients wish to undertake pre-immigration tax planning before they become US tax residents in order to reduce the tax bite. If they get things wrong with the RSD, the tax planning has just gone up in smoke or down in flames. Whichever analogy you prefer, the result will be the same – the tax planning simply will not work.
Residency Starting Date under the Green Card Test
The Treasury Regulations define the “Green Card” Test as follows:
“(1) Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.”
If you meet the so-called “green card test” at any time during a calendar year, but do not meet the so-called “substantial presence test” for that year, your RSD is the first day in the calendar year on which you are physically present in the United States as a Lawful Permanent Resident under the US immigration laws. You are a Lawful Permanent Resident of the United States, at any time, if you have been given the privilege, according to the immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if the US Citizenship and Immigration Services (USCIS) issued you an alien registration card, Form I-551, also known as a “green card.”
I understand that the green card is mailed by USCIS to a permanent address you designate in the United States. It can be a “care of” address. Sometimes applicants use a “care of” address of a relative. I understand that sometimes the applicant departs the US and the relative then forwards the green card to the individual overseas. I am not certain if this is really permissible. If you receive your green card abroad, then the RSD is your first day of physical presence in the United States after you receive your green card; this is your first day of physical presence as a Lawful Permanent Resident.
If you were a US resident during any part of the preceding calendar year and you are a US resident for any part of the current year, you will be considered a US resident at the beginning of the current year.
Here’s an example of how this so-called “No Lapse Rule” works: Mr. Kwok, a Chinese national, first entered the US with a visa on January 1, 2017 and departed the US on August 25, 2017. Due to his lengthy physical presence in the US during 2017, this means he was a US resident in 2017 under the Substantial Presence Test, (discussed here). In March 2018 he obtained a green card, entering the US on March 12, 2018 as a Lawful Permanent Resident. Under the aforementioned rule, Mr. Kwok is considered a US tax resident at the beginning of 2018 and is taxable on his worldwide income commencing January 1 2018, his RSD. If Mr Kwok had undertaken tax planning in January 2018 (for example, accelerated his receipt of a bonus or dividends) prior to his entry into the US as a Lawful Permanent Resident, such planning would simply fail.
The “Ouch” Rule – “Gotcha”!
What happens if you receive your green card abroad (see above example, when the individual uses a “care of” address of a US relative and the relative later forwards the green card abroad), but then, you never enter the United States? Are you still on the hook for US income taxes on your worldwide income? If so, when? Sadly under a literal reading of the Treasury Regulations, the answer to the first question is apparently “yes.” Under a special rule (yes, there is always a “special rule” giving the IRS power to say, “Gotcha!”) “if an individual meets the green card test for the current year but is not physically present in the United States during the current year, then the individual’s residency starting date shall be the first day of the following year.” Now that’s an ugly rule, folks.
While I have never seen this rule operate in practice, and while it may not impact many individuals, those who feel its impact will be very unhappy, indeed. They will become US tax residents on January 1 of the year following the year they got the green card even though they may never enter the USA as a green card holder. Unless and until they properly relinquish the card, the US tax impact will be ongoing each and every year. OUCH! You continue to have US resident status, under the green card test, unless:
- You voluntarily renounce and abandon this status in writing to the USCIS,
- Your immigrant status is administratively terminated by the USCIS, or
- Your immigrant status is judicially terminated by a US federal court.
Giving up the green card must be done correctly or US resident status will continue unabated, with all its implications of worldwide income taxation and tax information reporting.
A follow-up blog post will examine the RSD rules that apply when one is a resident under the “Substantial Presence Test”. It will also look at what happens when one is a resident under both the Green Card and Substantial Presence Tests, as well as nuances in the rules for “exempt” individuals and under Treaty provisions.
Posted: July 3 2019
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