Not everyone who has or gains citizenship or lawful permanent resident status in the United States wants to keep it. People have been leaving the U.S. on a permanent basis since its inception and the numbers are only rising. There are many reasons why you might chose to leave be it because of family, politics, or just wanting to return home for good. This makes you an expatriate. While this sounds derogatory, it is completely normal and common. However, for some of the wealthier expatriates, the Internal Revenue Service may hit you with a hefty tax before you leave called the green card exit tax.
What is the Exit Tax?
Firstly, the exit tax only applies to expatriates, so you do not have to worry about it if you have not done one of the following:
- Renounced or lost your U.S. citizenship (both native U.S. citizens and naturalized ones)
- Renounced your lawful permanent residence (green card status) after holding it for a substantial amount of time.
If you have done either one of these things, you are an expatriate. If you have been living in the U.S. under a nonimmigrant status (such as an H-1B), this does not apply to you.
Once you have determined that you are an expatriate, you need to find out if you are a covered expatriate or a noncovered expatriate. If you are covered, then you will trigger the green card exit tax when you renounce your status.
In some cases, you can be taxed up to 30% of your total net worth. It will be as though you had sold all of your assets and the gain generated was viewed as taxable income. This is a substantial amount and can be devastating if not handled correctly.
Covered vs Noncovered Expatriates
This is an important distinction to make, since you will not have to worry about the green card exit tax if you are a noncovered expatriate. Being “covered” means that you have fulfilled two requirements:
- You are an expatriate
- You have failed one of the three following tests:
- Net worth – one common way that people get hit with the green card exit tax is by having a net worth exceeding $2 million at the time that you lose your status.
- Tax liability – another way to trigger the tax is to have a high net income during the five years leading up to losing your status. In 2017, that threshold was $162,000 per year.
- Tax noncompliance – If, within the 5 years leading up to losing your status, you have evaded tax obligations, then you may trigger the exit tax. You will need to prove that you have been compliant with tax laws during that time to avoid this.
There are two exceptions to this. If you had another citizenship by birth and acquired a dual citizenship with the U.S. or became an expatriate before turning eighteen and a half years old, the green card exit tax will not be applied to your case.
If the tax is enforced, then you will either be asked for the full amount or taxed regularly on the income you receive, depending on which of the above tests you failed.
How to Avoid the Green Card Exit Tax
If you are a green card holder who plans on renouncing lawful permanent resident status, then the best advice is to avoid being considered a long-term resident. Generally, a rule of thumb is to avoid remaining in the U.S. longer than eight years under green card status. This should allow you to renounce your status without becoming an expatriate. This route is not possible for U.S. citizens either by birth or naturalization.
Be sure to rectify any noncompliance that you may have with tax law over the last 5 years. You can also find ways to reduce your average annual income below $162,000 to avoid triggering the tax. Lastly, there is the method of gifting assets through allocation.
If you are married, then your net worth will be calculated from person to person. This means that the two of you can have assets totaling up to $4 million provided that no single person’s net worth exceeds $2 million. The best way to make this happen is to distribute your assets by gifting them from one spouse to the other. This way, you can avoid triggering a taxable event and still remain under the target net worth. However, this can be a tricky situation and should not be done without the help of a qualified attorney.
How Our Immigration Attorneys Can Help
If you are planning on renouncing your citizenship or lawful permanent resident status and you feel that you would be considered a covered expatriate by the IRS, there are ways to avoid the exit tax. The best thing to do is to have an immigration expert advise you on how to allocate your assets so that you can be considered a non-covered expatriate.
Here at Immi-USA, our team of expert green card attorneys is always available to guide you through situations like the green card exit tax. To talk to one of our lawyers, you can fill out our contact form and schedule your consultation with our office today!