As individuals consider obtaining a U.S. green card through the lottery system, it is essential to be aware of the potential tax consequences associated with permanent residency in the United States. Before making the decision to become a green card holder, or if already holding one, it is crucial to understand the basic U.S. tax issues that come with permanent residency. This article discusses important tax considerations that green card holders should be aware of before taking the leap.
One crucial aspect to consider is tax planning before the “residency starting date” for individuals looking to become U.S. permanent residents. It is important not to make any mistakes in determining when this starting date occurs, as it can have significant implications for tax purposes.
Green card holders are treated the same as U.S. citizens from a tax perspective, meaning they are subject to U.S. income tax on worldwide income. This includes income from various sources such as salaries, business income, interest, dividends, and more. The tax rate is progressive, peaking at 37%, with an additional 3.8% Net Investment Income Tax for high earners.
Ownership in foreign entities can complicate a taxpayer’s situation, especially when U.S. shareholders are also employees of foreign corporations. Reporting requirements for U.S. persons with interests in foreign entities are stringent, with severe penalties for non-compliance. Detailed reporting is necessary for various foreign financial assets under the Foreign Account Tax Compliance Act to avoid penalties.
U.S. taxpayers are required to file numerous information returns when dealing with foreign assets or income. Non-compliance can result in severe penalties. The reporting extends to foreign financial assets under the Foreign Account Tax Compliance Act, requiring Form 8938 for taxpayers with significant foreign financial holdings. Failure to file can result in harsh penalties.
Green card holders are not automatically treated as U.S. residents for transfer taxes, but once domiciled in the U.S., gift and estate taxes apply to worldwide assets. Expatriation and exit tax rules come into play for long-term residents who relinquish their green card, with special taxes imposed on deemed sales of worldwide assets. Proper planning is crucial to minimize income, gift, and estate taxes for those considering or already holding U.S. permanent residency.
Consulting a tax professional is highly recommended for green card holders to navigate the complexities of U.S. tax laws and ensure compliance. Understanding and planning for the tax implications of U.S. permanent residency is essential to avoid significant and onerous consequences in the future. Planning before the eighth tax year of holding a green card can help individuals make informed decisions about whether to continue permanent residency in the United States.
