Living outside the United States does not eliminate your US tax obligations. US citizens and green card holders abroad must file a US tax return every year and may also need to file additional reports on foreign assets and accounts. Here is an overview of the key forms, what they cover, and how they interact.
Table of contents:
Foreign Earned Income Exclusion (FEIE)
Foreign Tax Credits (FTC)
Information Reporting and FBAR
Tax Preparation Software
Foreign Earned Income Exclusion (FEIE)
Is my foreign income automatically exempt from US reporting?
No. A common misconception is that foreign income is exempt because it can be excluded. Foreign earned income is not exempt. You must report it on a US tax return, and you must be a qualifying individual to elect the exclusion.
What types of income qualify for the exclusion on Form 2555?
The exclusion is available only for “earned” income. It cannot be used for passive investment income such as dividends, interest, or capital gains.
Foreign Tax Credits (FTC)
How does a Foreign Tax Credit work?
A Foreign Tax Credit provides a dollar-for-dollar reduction, subject to limitations, of your US federal tax burden for income taxes you paid to another country on income sourced there. It is claimed on Form 1116.
Can I claim both the FEIE and the Foreign Tax Credit?
No. Once you choose to exclude foreign earned income or housing costs, you cannot take a foreign tax credit on that same income. If you do take the credit, your previous choice to exclude that income may be treated as revoked.
Are there different forms for lawful permanent residents (LPRs)?
US citizens and LPRs generally use Form 1040. However, LPRs residing in a country with a US income tax treaty may be eligible to file Form 1040NR as a non-resident.
What is Form 8938?
Form 8938 (Statement of Specified Foreign Financial Assets) is used to report specified foreign financial assets. It often overlaps with FBAR reporting and must be attached to your annual income tax return when filed with the IRS.
Who must file an FBAR (Form 114)?
US citizens and LPRs with a financial interest in or signature authority over foreign accounts must file a Foreign Bank Account Report (FBAR). The definitions of “ownership interest” and “signature authority” are interpreted very broadly under the regulations.
Where is the FBAR filed?
Unlike other tax forms, the FBAR is not filed with the IRS. You must file it electronically with FinCEN (the Financial Crimes Enforcement Network) through the BSA E-Filing System on Form 114.
What are the penalties for FBAR non-compliance?
The statutory penalty for failing to file, or filing late, is $10,000 per failure. If the failure to file was intentional, the penalty can increase to 50% of the account balances.
There are important unintended tax consequences that can befall individuals who have a green card depending upon their factual circumstances: see, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9).
Tax Preparation Software
Can I use standard tax software for these international forms?
Often, no. Most tax preparation software does not support Form 8938 or other forms related to non-US assets. These forms frequently require manual completion using an Adobe Acrobat version of the form.
Read the full analysis here.
When long-term green card holders give up their green card, they face the same exit tax rules as US citizens who renounce citizenship. There is one exception in the law that allows certain dual citizens by birth to avoid covered expatriate status even if they meet the income or asset tests. Long-term green card holders cannot use it. Here is why.
Table of contents:
What makes someone a covered expatriate?
Is there an exception to the income and asset tests?
Who can use this exception?
Why green card holders cannot use it
What this means if you are a long-term green card holder
What makes someone a covered expatriate?
When you give up your green card (or renounce US citizenship), the law determines whether you are a covered expatriate. You are a covered expatriate if you meet any one of three tests: an average annual income tax liability above an inflation-adjusted threshold, a net worth of $2 million or more on the date of expatriation, or a failure to certify 5 years of US tax compliance – where it is commonly certified on IRS Form 8854.
Meeting even one of these three tests makes you a covered expatriate. All three tests apply equally to US citizens who renounce and to long-term lawful permanent residents (LPRs) who give up their green card.
Is there an exception to the income and asset tests?
Yes, for some people. Under IRC Section 877A(g)(1)(B), certain individuals are exempt from the income and asset tests. If this exception applies to you, you can avoid covered expatriate status even if your net worth exceeds $2 million or your income exceeds the threshold. The certification requirement under Section 877(a)(2)(C) still applies to everyone, including those who qualify for this exception.
Who can use this exception?
The exception is narrow. Under the statute, it applies only to an individual who: became a citizen of the United States and a citizen of another country at birth; as of the date of expatriation, continues to be a citizen of and is taxed as a resident of that other country; and has been a US resident for no more than 10 taxable years during the 15-year period ending with the taxable year of expatriation. Only someone who acquired US citizenship automatically at birth, while also holding citizenship of another country from birth, can potentially qualify.
Why green card holders cannot use it
Lawful permanent residents are not US citizens. They hold a green card, which is a grant of permanent resident status, not citizenship. Because the exception in Section 877A(g)(1)(B) applies only to individuals who became US citizens at birth, long-term LPRs cannot satisfy this requirement by definition. The exception is simply not available to them.
What this means if you are a long-term green card holder
A long-term LPR who meets either the $2 million asset test or the income tax liability test will become a covered expatriate, even if they fully satisfy the 5-year certification requirement. Satisfying the certification requirement is necessary for everyone, but for long-term LPRs it is not sufficient on its own. If you also meet the income or asset test, you are a covered expatriate regardless.
The consequences include the mark-to-market exit tax on unrealized gains and the Section 2801 tax on covered gifts and bequests to US persons. These consequences can affect your US family members for decades. Understanding them well before you give up your green card, not after, is the only way to plan for them.
There are important unintended tax consequences that can befall individuals who have a green card depending upon their factual circumstances: see, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9):
This post provides general information only and is not legal advice. Consult an experienced attorney for guidance specific to your situation.
Read the full analysis here.
