US Tax Implications: Worldwide Income for Green Card Holders
So, you’re married to a US citizen or worked in the US at some point in your life, and you’re an official green card holder. What happens to your tax obligations if you decide to move outside of the States for a given amount of time?
Many expats would like to hold on to their green card while overseas as it allows them to still work in the US if they decide to return. However, keeping a green card means you must declare your worldwide income to the IRS, regardless of where you live.
This article covers what you, a green card holder abroad, need to know about your US tax obligations. We will also provide information on strategies you can apply to reduce your tax liability and save money.
Do green card holders overseas have to file a US tax return?
Yes. As a green card holder, you have the same US tax resident status as any other US citizen. As a result, every year you must report your worldwide income to the IRS, no matter where you currently reside. You declare your income with IRS Form 1040.
The United States is one of two countries in the world (along with Eritrea) that imposes citizenship-based taxation. Many American expats were not (and still aren’t) aware of this and have not been keeping up with their US tax filing obligations.
Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010, which requires international banks to report the financial activities of US citizens and green card holders to the IRS. Net: many US citizens and Green card holders alike are rushing to catch up on filing tax returns.
Read more: What is Citizenship-Based Taxation?
What if my green card expires? Do I still have US tax obligations?
An expired green card doesn’t take away your US tax obligations. Even if your green card expires, you must still file your US taxes while abroad and remain compliant with the IRS. The only way green card holders can lose their status as US tax residents is if they abandon their green card.
To abandon your green card, you need to file USCIS Form I-407 before or after you leave the US.
As a heads up, green card holders who have been a resident of the US for eight of the past fifteen years will be subject to an exit tax during the abandonment process. On the other hand, green card holders of less than two years won’t have to pay an exit tax.
What are the consequences of not filing my US tax return?
Green card holders must follow US laws (including tax laws) if they want to retain their status. Failure to comply with US tax obligations can lead to visa revocations and penalties.
Not filing your taxes can also prevent you from becoming a permanent resident or US citizen. To upgrade your visa status, the US immigration authorities might ask you for proof that you have been consistent with your tax obligations.
How can green card holders abroad reduce their tax liability?
As mentioned above, green card holders overseas must file their US tax returns and taxes in their new country of residence. Which begs the question: how can green card holders avoid double taxation?
The IRS has various programs to help US expats reduce their tax liability abroad. These include:
Foreign Tax Credit (FTC)
Foreign Tax Credit (FTC) helps US expats claim tax credits on a dollar-for-dollar basis depending on the foreign taxes that they’ve already paid. They file their Foreign Tax Credit with IRS Form 1116.
Here’s how Foreign Tax Credits work: Let’s say that you’re a green card holder who lives in Portugal, and you’ve paid $1,200 worth of taxes to that country. You also owe $2,000 worth of taxes to the IRS.
You can use the $1,200 paid in Portuguese taxes to claim as tax credits. So, instead of owing $2,000 to the IRS, you’ll only owe $800. Foreign Tax Credits are particularly useful if you live in a country with a higher tax rate than that in the US.
The requirements to benefit from the Foreign Tax Credit program are:
- – Only taxes that a country imposes on you qualify
- – The tax you paid must be legal
- – The tax must be an income tax
Taxes that aren’t eligible as Foreign Tax Credits include sales tax, Social Security tax, and real estate tax.
Foreign Earned Income Exclusion (FEIE)
The Foreign Earned Income Exclusion helps expats exclude a significant portion of their foreign earned income from their US tax liability. In 2022, they can exclude up to $112,000 in foreign income under the FEIE, which they file with Form 2555.
To qualify for the FEIE, you must pass either one of the following tests: the Bona Fide Residence Test or the Physical Presence Test.
The Bona Fide Residence Test requires you to prove your social and economic ties to your new country of residence. Some requirements to pass the Bona Fide Residence Test include proof of residence in a new country and a foreign address.
On the other hand, the Physical Presence Test takes into account how much time you’ve spent overseas. You need to spend at least 330 days in a foreign country during any 365-day stretch to pass the Physical Presence Test.
Foreign Housing Exclusion (FHE)
With the Foreign Housing Exclusion (FHE), you can exclude your foreign earned income from your US tax return based on your foreign housing expenses. To qualify for the Foreign Housing Exclusion, you must also qualify for the FEIE. You also use the same Form 2555 to claim your Foreign Housing Exclusions.
Here’s a quick list of expenses that qualify under the FHE:
- – Rent
- – Home utilities
- – Residential parking
- – Occupancy taxes
- – Fees required to secure a leasehold
Do I, as a green card holder, have to report my foreign accounts?
It depends on the value you hold within your foreign accounts. If you possess more than $10,000 across several foreign accounts at any point in the tax year, then you’ll need to file the Report of Foreign Bank and Financial Accounts (FBAR). You will file the report with FinCEN Form 114.
However, foreign accounts that you don’t need to report include:
- – Accounts owned by a government entity
- – Money held in an individual retirement account
- – Accounts that a US military banking facility maintains
- – Accounts owned by an international financial institution
The deadline for filing is April 15th. However, expats do benefit from a six-month extension to October 17th.
Still have questions about your US tax obligations as a green card holder?
This can feel like a lot of information to take in at once — and that’s ok! Understanding US taxes sure isn’t an easy feat.
That’s why our team at Bright!Tax handles all the tax paperwork for thousands of US citizens and green card holders abroad so they stay compliant with the IRS, avoid penalties, and have less stress. Contact us today to learn more about our services!