Before delving into the nitty gritty, let me start with a disclaimer. I am not an immigration specialist and this post does not address, other than in a very general manner, immigration issues associated with surrendering a green card at the border. Today’s blog post examines the US tax issues that surround relinquishing the green card – especially at the point of entry, when circumstances are not ideal for tax planning. If you have already abandoned your green card, whether voluntarily or if you believe it was involuntarily done, you may need some US tax advice. I am happy to help.
A US lawful permanent resident (LPR) or “green card” holder is most probably aware that long periods spent outside the United States can result in problems upon re-entry to the US. The US Customs and Border Patrol (CBP) officials will examine all returning green card holders to determine whether, for any reason, re-entry should be denied. Additional probing questions will be asked after a long absence. What does this mean for LPRs who have been stranded abroad due to the COVID-19 pandemic? To my knowledge, US immigration authorities have not issued statements or rules concerning treatment of returning LPRs with extended absences resulting from pandemic issues.
Lawful Permanent Resident and US Tax
LPR status is granted to individuals who intend to live in the United States permanently. LPRs have the “privilege” of (i) living and working in the United States permanently and (ii) paying US income taxes on their worldwide income. LPR status can be lost for immigration purposes, meaning the individual has lost the right to live permanently in the US and work in the US without a visa. However, even if the immigration rights have ended because the individual has lost the intention to live permanently in the US, this does not mean that the US tax obligations to pay tax on worldwide income have ended. That’s the good, the bad and the ugly all in one little card!
Individuals must remember that the right to live permanently in the US has US tax consequences even if the actual green card has expired from an immigration standpoint. The rules for immigration are different from the rules for US taxation. Once an individual has been granted the right of permanent residence in the US, and receives the green card, taxation on worldwide income occurs and will continue until US tax residency is severed according to specific and detailed US tax rules. Even if the individual is not complying with the terms of maintaining the green card for purposes of the US immigration laws, continuing to hold the card still counts for US tax law purposes. In other words, it is possible to have lost the right to live in the US under the immigration laws, but still be subject to US taxation under the tax laws. I have written on this issue before; it has been battled out in court and the law is clear.
I-407 Abandoning the Green Card
The filing of Form I-407 signifies that the individual has voluntarily abandoned his or her status as a lawful permanent resident of the United States. Each year several thousand people file Form I-407, Record of Abandonment of Lawful Permanent Resident Status. Sometimes, CBP officers will ask individuals to sign Form I-407. This may happen if the individual has been outside the United States and the CBP officer believes that on account of the prolonged overseas stay, the individual has abandoned his US residency. Such an individual has the right to defend himself in removal proceedings. The CBP officer may ask him to sign Form I-407 so that this opportunity is waived, meaning the individual in essence voluntarily deports himself. Form I-407 must be signed voluntarily; no one can be forced to sign it. If the individual refuses to sign Form I-407 he or she is issued a Notice to Appear before an immigration judge who will determine whether the individual has lost lawful permanent resident status.
Surrender of Green Card — WARNING for LTRs!
LPRs who have held the card for a significant time are called “long term residents” (LTR) for US tax purposes. Generally, an LTR is one who has had the card for 8 tax years out of the past 15 tax years. An LTR who surrenders the green card (whether or not at the border at the urging of CBP) can suffer serious US tax consequences if the individual is treated as a so-called “covered expatriate” under the US tax laws.
Generally speaking, giving up the card is treated as an expatriation. Holding a green card for the extended number of tax years mentioned above, will make relinquishing the card more complicated from a US tax perspective and can result in the individual being treated as a “covered expatriate”. For purposes of computing the 8 year holding period, having the green card for even one day during the calendar year will cause that entire year to be counted (e.g., if the taxpayer receives the green card on December 10, 2019, the full year 2019 is counted; similarly if he abandons the green card say, January 2 2020, the full year 2020 is counted).
Under the US tax laws, a “covered expatriate” is an individual deemed under the law (in other words, conclusively presumed) to have expatriated for a tax avoidance motive. As my readers well know, tax avoidance is a very bad motive to have, and the individual tarred with the covered expatriate brush will suffer adverse tax consequences. In fact, not only the individual, but any US person to whom he or she may later give a gift or a bequest will suffer certain tax consequences as a result of this prohibited motive.
Who is a “Covered Expatriate”?
Under the US expatriation rules, an individual will be treated as a “covered expatriate” if any one of the following tests apply:
- The individual’s average annual net income tax for the 5 years ending before the date of termination of residency is more than a specified amount that is adjusted for inflation ($171,000 for 2020). Remember this means the average of US income tax paid by the individual, not his average income.
- The individual’s net worth is $2 million or more on the date of termination of residency.
- The individual fails to certify on Form 8854 that he or she has complied with all US federal tax obligations for the 5 years preceding the date of termination of residency.
The tax certification requirement is usually the most troublesome provision for green card holders who must file Form 8854, many of whom reside outside the US, and are unaware of their US tax filing duties. The US tax rules are very complicated when it comes to foreign (i.e., non-US) assets, which are often held by green card holders, who may be blissfully unaware of special reporting rules for such assets. Many mistakenly believe that because their green card has expired for immigration purposes, they are no longer responsible for US taxes. Nothing could be further from the truth.
There may be some forthcoming relief from the Internal Revenue Service for LTRs who have failed to file Form 8854. See my post here on this topic. Without this relief, they can be treated as “covered expatriates” for failing to file the form.
Tax Impact of Being a “Covered Expatriate”
If any one of the three tests are triggered, the individual is a “covered expatriate” subject to the “Exit Tax” or “Mark-to-Market” regime. Under this regime, generally, all property owned by the covered expatriate worldwide is treated as sold for its fair market value on the day before the expatriation date. This ‘phantom’ gain is then taken into account for the tax year of the deemed sale and subject to tax, usually at capital gains rates. In addition, a 3.8% “net investment income tax” will likely also apply to this deemed gain if certain modified adjusted gross income thresholds are met.
The tax burdens don’t stop there. Special onerous tax rules apply to the covered expatriate’s deferred compensation plans and specified tax deferred accounts. In addition to the Exit Tax, US recipients of any gift or bequest at any time in the future from the “covered expatriate” will be hit with a special transfer tax upon receiving that gift or inheritance under Code Section 2801. Currently a 40% tax rate is imposed on the value of the gift or inheritance. More information about this transfer tax can be found on my tax blog posting here.
At the Border and Feeling the Heat
What does all this mean for the individual at the border who is asked (perhaps “forcefully”) to sign the I-407? If the individual has the potential to be a covered expatriate, he had best NOT sign the Form! Instead, he should obtain competent US tax advice and get his US tax situation completely in order prior to the appearance before the immigration judge who will render a decision on LPR status. Remember, the Form I-407 must be signed voluntarily; individuals have a right to refuse to sign it and instead receive a judicial determination of their residency status.
All of these issues, as well as possible tax planning, should be discussed with a tax professional before the green card is abandoned. Above all, don’t succumb to CBP officer pressure at the airport!
Posted: May 28, 2020
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