December 20, 2023
Well, this is yet another reminder that an ounce of prevention is worth a pound of cure. In this case, a lot more pounds of cure…
I wanted to share this particular case hoping it may help someone who is going through the process of obtaining US residency but hasn’t yet arrived into the country.
The US is one of those few countries that taxes its citizens and permanent residents on their worldwide income even if they no longer live there. While most US citizens leaving the US may be aware of their continuing US filing obligation, it often catches off guard non-suspecting citizens of other countries moving to the US on a green card status and spending here initially less than half a year.
As a refresher, if the individual has a US green card at any time during the tax year, he or she is considered a US resident alien. The starting date for this status is the first day that the person enters the United States while holding a valid green card visa. This also starts the individual’s US tax reporting obligation. Once a person is a resident alien under the green card test, that status continues until:
visa status is formally revoked or rescinded administratively; or
the individual abandons green card status voluntarily; or
an election is made under the terms of an income tax treaty by the individual to be treated as a resident of another country and a nonresident of the United States for income tax purposes.
Even staying outside the United States for the full tax year, the individual will continue to be a resident alien for income tax purposes simply because he or she holds the green card visa. Days of presence in the United States become irrelevant.
Let’s now consider this case. An individual from a country with which the US does not have a bilateral income tax treaty receives US permanent residency status while continuing to reside in her country of origin. She chooses to arrive in the US without significant delay to establish her status for immigration purposes. The trip lasts just a few days, and she returns to her country to sell her home, terminate her employment, and move to the US for good. Upon wrapping up financial affairs in her home country, the individual comes back to the US later in the year spending in total less than 100 days in the US during that year.
Will she have to file a US tax return even though she spent less than 100 days here? Will she owe US taxes on her gain from sale of assets including her home located in her country of origin?
Unfortunately, the answer is yes to both questions. Once she stepped on the US land with her green card, she has established her US tax residency status. Given that there is no treaty between her country of origin and the US, the only possible exception from US residency is out of the window.
Since she sold her assets after her initial trip to the US as a green card holder, any gain realized from sale of her assets including her home that she may have owned for decades will be taxed in the US immediately creating an unexpected and unwelcome tax liability. Her employment and any other income earned after her initial trip to the US through the end of that year, regardless of its source, will also be taxed in the US.
This may create significant hardships for new US residents who may have already used cash proceeds to buy new homes here resulting in lack of liquidity to pay US taxes.
Had this individual received tax advice before her initial trip to the US, she would have been told to sell her home and other assets prior to her initial trip here. She would then have been considered a US non-resident despite having received a green card since she had not yet made her first US trip as a green card holder.
I guess this is a truly unfortunate outcome which may have possibly been prevented with timely planning.
The above blog post is by no means to be construed as tax advice, and I highly recommend seeking a tax professional well versed in cross-border tax matters.