Departure Tax Planning for Relinquishment of “Green Cards”

As some holders of U.S. lawful permanent residence visas (“green cards”) are aware, holding your green card too long can cause you to become a “Long-Term Resident.” Long-Term Residents may become subject to the “expatriation” tax regime that applies to abandonment of U.S. citizenship when they formally relinquish their green card. As discussed on our webpage entitled “Expatriation Tax Planning for US Citizens,” application of that regime on the relinquishment of your green card can have painful tax repercussions for those who do not plan to avoid it, including the “deemed sale” of your worldwide assets, acceleration of tax deferred income and gains, disadvantageous tax treatment of trusts of which you are a beneficiary and application of a lifelong inheritance tax regime that taxes gifts and devises to US beneficiaries of assets located outside the U.S.

For this purpose, a “long-term resident” means any non-U.S. citizen who is a lawful permanent resident “in at least eight taxable years during the period of 15 taxable years ending with the taxable year during which the individual ceases to be a lawful permanent resident.” Unfortunately, the preceding language quoted from the applicable statute is deceiving - most lay people assume it means you need to relinquish your green card before the 8-year mark. However, the IRS takes the position that an individual is considered to be a lawful permanent resident in a taxable year if he or she is a lawful permanent resident during any portion of that year (meaning “on any day”). According to this position, it is theoretically possible to become a “long-term resident” by spending as few as 6 years and two days as a lawful permanent resident. Thus, for example, if you receive your “green card” on December 31st of 20X1 and abandon it on January 2, 20X8, you would have been a lawful permanent resident at some time during 8 taxable years, even though you held your green card only 6 years and a couple of days)! This language is essentially a tax trap into which many lawful permanent residents have fallen.

In cases where we are involved in “pre-residence” tax planning for future US lawful permanent residents (see our webpage entitled “Pre-Residence US Tax Planning”), we are in a position to point out this trap. That trap is just one of the reasons why we recommend that “departure tax” planning commence at the same time as “pre-residence” tax planning. In those cases, our clients are armed ahead of time with the tools they need to plan their stay in the US so as to avoid experiencing negative tax consequences at the end of the journey.

We also advise green card holders who failed to formally relinquish their visas when they left the US and took up residence in another country (the IRS position is that you are still a US income tax resident)! We can advise you concerning your options for late abandonment and IRS programs to avoid penalties for non-filing during the years following your move abroad.

Our cross-border tax practice regularly advises green card holders concerning planning for the relinquishment of their green cards before becoming long-term residents, as well as planning for avoiding “covered expatriate” status. It is important to consult a cross-border tax attorney concerning such planning long before the date you wish to relinquish your green card. We are also experienced advising those who become subject to the deemed sale and other departure tax provisions, as well as those who become subject to the special inheritance tax regime. We welcome any inquiries that you may have concerning your specific tax situation. Feel free to call us at (760) 578-5093, contact us via email at Brent@LanceCrossborder.com or by using our online contact form.