According to the Department of Homeland Security, there were 1.1 million new “Lawful Permanent Residents (LPRs) of the US, known as Green Card Holders, admitted in 2017. This coveted document is what you need to be a legal resident of the United States.
While that number is high, a 2017 article by Pew Research reported that more than half of these new card holders are individuals who already resided in the US on temporary visas. The newly issued green card merely “adjusted their status” to Legal Permanent Resident (LPR). These people have been waiting, sometimes for years, as they have navigated the long and winding path through US Citizenship and Immigration Service (USCIS) towards acquiring that magic card.
On the other side, however, have you ever wondered how many people lose their green card every year, and if so, how many give up their status voluntarily?
Because of rules surrounding foreign travel for legal permanent residents and the restricted time frames imposed (less than a year), losing your green card could happen to anyone without actually planning to do so. And, according to the article, Abandonment of Residence by U.S. Green Card Holders (Ilona Bray, J.D.), “…if you ever leave the US with the intention of making some other country your permanent home, you give up your US residency when you go.”
According to the Federal Register’s “Quarterly Publication of Individuals Who Have Chosen To Expatriate, as Required by Section 6039G,” anywhere between 9,000 to 11,000 long-term residents and citizens choose to abandon their LPR status annually. With so many people clamoring to get into the country, why would someone voluntary leave?
Why Would You Voluntarily Relinquish Your Green Card?
There are generally two main reasons why you, as a green card holder (as well as citizens), may choose to abandon LPR status. One involves travel, the other, taxes.
You may find that business interests, family or other reasons often require you to travel outside of the US, sometimes for several months at a time. If such travel requires you to stay outside the US for one year or more, you must apply for a re-entry permit (Form I-131, “Application for Travel Document”) with the USCIS prior to leaving the United States. Re-entry permits are generally valid for 2 years from the date of issuance. If you remain outside of the US longer than the date the permit was issued, however, you may be denied entry back into the US.
To complete Form I-131, you must provide personal information such as your US address, your Green Card information, your proposed travel itinerary (which countries you intend to visit and for how long in each), and a general description of the purpose for your travel. Because biometrics (fingerprints) are typically required as part of the application process for this form, you must complete it before you travel.
Fortunately, leaving the US before your I-131 application is approved will not affect the USCIS’ decision respecting approval of your F-131. However, on your application, you must designate ahead of your departure a US consulate, embassy, or USCIS office in a country where you will be traveling to pick up the document.
Remaining outside of the US longer than the date of your travel permit could cause a denial of reentry. If an emergency or some other unforeseen circumstance causes you to be outside of the US for longer than a year, you must apply at a US consulate abroad for a special immigrant visa as a returning resident. You must then convince a consular officer that you never planned to abandon your US residence, and they will require proof that indeed it was something unplanned which kept you away, such as a medical emergency. A letter from a doctor testifying to this fact would constitute such proof. There is no guarantee, however, that the USCIS will accept your explanation, and you could lose your Green Card.
If making sure all these documents are properly applied for and issued every time you must travel outside the US for extended periods of time has become a burdensome task, you may be a candidate for abandonment.
The second – and by far reason most often cited by LPRs to abandon their Green Cards – is taxes.
As Andrew has discussed elsewhere on our blog, the US government taxes you on your worldwide income, so you must satisfy all of the paperwork requirements imposed by the US government on its taxpayers. For expats and legal permanent residents, this paperwork can be excessively burdensome because of the many additional “information returns” that are required. The only way to avoid this status is to give up your green card.
The US has one of the most onerous systems when it comes to all the additional forms that US persons and LPRs with foreign assets are required to file with their annual income tax returns. Just one example is FBAR, “The Report of Foreign Bank and Financial Accounts,” which must be filed to report ownership of any foreign financial accounts whose aggregate value exceeds $10,000. Bank accounts, investment accounts, life insurance, pensions, credit accounts, safe deposits at banks, and any similar accounts or arrangements are examples of the types of accounts included. And while there is no tax due with this form, failure to notify the IRS that you own such accounts could result in severe civil and even criminal penalties.
Being taxed on your worldwide income often seems like double taxation since you also pay taxes in the country where it was earned, but there are a few provisions in place to mitigate this double taxation scenario. Two such provisions are one, any tax treaty which the US has entered into with a foreign country. Under such a treaty, residents (not necessarily citizens) of the foreign country are taxed at a reduced rate or are exempt from US taxes on certain items of income they’ve received from sources within the United States. Second, under the Foreign Tax Credit provision (Form 1116), taxpayers may receive a dollar-for-dollar credit towards income for taxes already paid on that income from foreign countries.
While these two provisions can result in a reduced tax bill, the process by which to claim these benefits (notably option 1) can be tedious to navigate and usually requires the expertise of a professional tax adviser or attorney who is knowledgeable about international and expat tax law.
The same could be said for the myriad of other “informational forms” expats and LPRs must complete every year with respect to their wages, global business interests, and investment income.
If you are interested in the potential of saving hundreds, even thousands of dollars in taxes not paid or if the burden of having to complete all the paperwork as required by the IRS year after year becomes too onerous to be worth the effort, you may be a candidate for abandonment.
How to Begin the Process of Abandonment: Form I-407
If you decide to abandon your US residence, the first step is completing Form I-407, “Record of Abandonment of Lawful Permanent Resident Status.”
This form is fairly straightforward. You will provide your name and legal resident address information, Green Card (Form I-551) information, location from where you are submitting the form (outside the US in-person, outside of the US by mail, or at a port of entry into the US). You must also provide the USCIS Online Account Number if have previously filed an application, petition, or request using the USCIS online filing system.
Other important information required includes your country of birth or nationality, the date of your last departure from the US, a mailing address abroad, and your reasons for abandoning lawful permanent resident status.
Where to File
You may submit Form I-407 in person or by mail to a location with a USCIS international field office. You may also mail the form to the nearest USCIS international field office.
Once you’ve completed the form, you must be sure to sign it since USCIS will not accept unsigned forms. By completing this form, you are agreeing to the following terms and conditions:
- Waiving the right to a hearing before an immigration judge who would decide whether you have lost your legal permanent resident status due to abandonment, or
- If you do not waive this right and prefer to go before an immigration judge instead, you would have the right:
- To be represented at no expense to the U.S. Government by an attorney or accredited representative; (in other words, if you want legal representation, you have to pay for it yourself);
- To challenge any evidence that Dept of Homeland Security (DHS) may present against you;
- To present evidence in your favor;
- To require that DHS prove, by clear, unequivocal, and convincing evidence, that you have lost his or her lawful permanent resident status through abandonment;
- To appeal a decision against you.
Now, it is unlikely you would choose to have a hearing if you are voluntarily abandoning the Green Card. Nevertheless, you have the rights as enumerated as above, and should be aware of them.
Consequences of Filing Form I-407
By filing form I-407, you may trigger what is known as “the exit tax.” Expatriation tax provisions are found under Internal Revenue Code (IRC) sections 877 and 877A, “Tax Responsibilities of Expatriation,” which covers both US citizens who have renounced their citizenship, as well as long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes.
Section 877A rules apply to you if:
- Your average annual net income tax for the five years before termination of residency is more than $165,000 (2018, Form 8854); or
- Your net worth is $2 million or more on the date of termination of residency; or
- You fail to certify, under penalties of perjury, that all US federal tax obligations have been complied with for the five tax years preceding the tax year that includes the expatriation date. (By timely filing Form 8854 you are making this certification).
If any of these rules apply, you are considered a covered expatriate.
You may not be subject to the exit tax if you have complied with number 3 above and if you fall under the dual citizen or minor rules, which are:
- Dual Citizen
- You simultaneously became a US citizen and a citizen of another country at birth and as of the expatriation date, you continue to be a citizen of the other country and are taxed as such;
- You have been a US resident for not more than 10 tax years during the 15-tax-year period ending with the tax year during which the expatriation date occurs (residency determined under the substantial presence test).
2. The Minor Test
- You relinquish US citizenship before age 18 and you have been resident of the US for not more than 10 taxable years before the date of relinquishment.
SIGNIFICANCE OF THE DATE OF EXPATRIATION
If you are a LPR, the date of your termination of lawful residency is the earliest of:
- The date you voluntarily abandoned your LPR status by filing Form I-407;
- The date you became subject to a final administrative order that you abandoned your LPR status;
- The date you became subject to a final administrative or judicial order for your removal from the US under the Immigration and Nationality Act;
- If you were a dual resident of the US and a foreign country with whom the US has a tax treaty, the date on which you commenced being treated as a resident of that country, and you properly gave notice to the Secretary of such treatment on Form 8833 (“Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)”), by timely filing the form with your income tax return.
The expatriation or abandonment date is important because that date determines when any property or assets you own will be valued for tax purposes. The primary “gotcha” about the exit tax is that the IRS utilizes a mark-to-market valuation method. This means all property and assets owned by a covered expatriate is deemed to have been sold for its fair market value (FMV) on the day before the expatriation date.
There is a threshold of value to meet before any taxes are owed. If your net worth is less than $2 million and you don’t meet the above IRS income test under Section 877A, it’s likely won’t owe any exit tax.
If you are worth more than $2 million, however, it’s probable you will owe tax. But exactly much would you owe? Under the mark-to-market method, it would be as if you sold all your assets for FMV the day before you expatriated and paid whatever long-term capital gains, ordinary income or other applicable tax would have been owed. If you own, or have interest in a corporation, partnership or real property, you will have to get a professional appraisal done to determine the fair market value of those assets, and whatever gains (if any) you would have realized IF they had been sold.
Any gains from these mark-to-market “deemed” sales are taken into account without regard to other US tax laws. Gains are generally included for the tax year of the deemed sale, and the same treatment is made for any losses from deemed sales.
As of 2018, you get an exclusion amount on the first $711,000 in gains from such sales (this number generally increases slightly each year as adjusted for inflation). For married couples who expatriate together, the exclusion amount (again, for 2018) doubles to $1.422 million. So, if you own stock worth $1 million, it’s below the taxable threshold so you wouldn’t owe any exit tax. If your stock increases in value after expatriation, you can sell it any time and owe no US taxes on it.
Net capital gains from deemed sales are taxed immediately, which has the effect of accelerating income for a person leaving the United States. These rules apply to things like IRAs, pensions, deferred compensation plans, and beneficial interests in trusts.
There are a few exceptions to the mark-to-market valuation rule for certain assets. These exceptions are discussed in more detail within the 10 pages of instructions for Form 8854. Some deferred compensation plans, specified tax deferred accounts and interests in nongrantor trusts fall under these exceptions.
DEFERRING TAX ON MARK-TO-MARKET ASSETS
You can elect to defer the payment of the mark-to-market tax, but several rules apply, the most of which include (a) Deferral is on a property-by-property basis; (b) The deferred tax on a particular property is due the year in which you dispose of the property; (c) Interest accrues during the period of deferral, and (d) you must provide the IRS with adequate security (such as a bond). (for all deferral conditions, see the Instructions for Form 8854, “Deferral of Payment of the Mark-to-Market Tax,” page 3.
Regardless, if you are required to pay some tax it’s likely to be less than you would have paid if you sold that assets while still being a US taxpayer. And, if any asset that you paid exit tax on gains in value after you leave, those additional gains are yours.
WHAT IF I HAVE NOT BEEN IN COMPLIANCE FOR PRIOR TAX YEARS?
If you have not been in compliant in filing all the requisite forms for prior years, you must get into compliance before officially abandoning your LPR status. You can do this by submitting to one of the IRS’ voluntary tax amnesty programs as described below:
- Traditional (IRM) IRS Voluntary Disclosure Program: the Internal Revenue manual states that while voluntary disclosure won’t automatically guarantee you immunity from prosecution, it can result in prosecution not being recommended;
- Streamlined Domestic Offshore Procedures – pay a smaller penalty up front to avoid a larger one later. You are eligible to participate if you (a) certify on IRS Form 14654 (“Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures”) that you were not willful in non-compliance; (b) you don’t qualify as a foreign resident; and (c) you file timely tax returns.
- Streamlined Foreign Offshore Procedures – those seeking amnesty under this option must: (1) meet the applicable non-residency requirement; (2) must have failed to report the income from a foreign financial asset and pay any required tax; and may have failed to file an FBAR (FinCEN Form 114) with respect to a foreign financial account, and (3) such failures resulted from non-willful conduct.
- Reasonable Cause – according to Golding & Golding attorneys who specialize in expat and international tax issues, reasonable cause also goes by these alternative names: “Delinquent FBAR Reasonable Cause” and “FBAR Penalty Reasonable Cause.” These options typically require that the taxpayer amend or file at least 3 years’ of prior year tax returns and six years of FBAR filings.
One of the final consequences of expatriation is that IRC code section 6039G of the Health Insurance Portability and Accountability Act (HIPPA) requires that your name be recorded in the Federal Register not more than 30 days after the close of each calendar quarter. This includes not only natural born and naturalized citizens, but also long-term residents as defined in section 877(e)(2).
Abandoning your green card is not a decision one makes lightly, because while there are benefits, there are things you must give up as well. If you deem the trade-off worth it, then proceed. But always, always consult a tax professional who is an expert in both international tax law and expat taxes. It is also worth talking to someone who has taken this step before you. Andrew Henderson took this ultimate step about one and a half years ago. You can read about his experience here.
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