Easy Math for Determining Long-Term Resident Status

Hello and welcome to Expatriation Only, the biweekly newsletter that focuses on people renouncing U.S. citizenship or giving up green cards.This week's edition was triggered by a query from a reader, who was unclear about how green card holders figured out whether the exit tax rules applied to them (or not).The exit tax rules apply to expatriates. Citizens become expatriates by relinquishing U.S. citizenship. Immigrants become expatriates by (1) being immigrants for a long time, then (2) giving up their immigrant visa status.Immigrants who hold their permanent resident visas (green cards) for long enough to be hit by the exit tax are called long-term residents.Your objective, as a green card holder, is to avoid being a long-term resident unless you really, truly want to live in the United States indefinitely.

Green Card to Long-Term Resident to Expatriate

Let's talk to green card holders this time, and deal with a bit of obtuse Internal Revenue Code mathematics.If you have a green card for too many years and then give it up (or have it forcibly taken from you), you will be exposed to the exit tax rules.What does too many years mean? Eight. But it isn't simple to count from zero to eight, according to the exit tax rules.

Long-Term Resident Defined

A long-term resident is someone who:

is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the [expatriating] occurs.¹

A lawful permanent resident is person who has a permanent immigrant visa. Someone who has that visa will get a card. That is green(-ish). Out here in the real world, everyone calls such a person a green card holder.The expatriating event that signals the end of the 15 year period is ceasing to be a lawful permanent resident of the United States, as defined by IRC § 7701(b)(6).² There are three ways this happens:

• You abandon the green card visa voluntarily;
• The government takes your visa away from you; or
• You elect to be a nonresident of the United States for income tax purposes, using an income tax treaty.

For the rest of this discussion, I will assume that you are planning to give up your green card voluntarily, and need to know whether the exit tax will affect you.

The Incremental Counter Method for Counting to Eight

So let’s turn to the time frame. We need to know whether, during a 15 year period, you had eight things they call “years”. (They aren’t really “years”). Let’s see how to count to eight.The counting method is non-intuitive. Here is how to figure out the answer for yourself.We are going to think of this like a little incremental counter mechanism:

• One thing make the counter go up, one tick at a time: your visa status in a calendar year.
• Another thing makes the counter go down, one tick at a time: things you did (or did not do) on your U.S. income tax return.

First go up, then go down. If, at the end of your little exercise the number you have is eight or larger, you are a long-term resident and you will be subject to the exit tax rules when you abandon your green card.

Find the 15 Years That Matter

First, look at the 15 year period that ends with the year that you (plan to) give up your green card.

ExampleYou plan to give up your green card in 2016. This means the 15 years that matter (to determine whether you are a long-term resident or not) is 2002 through 2016.

Ignore anything that happened in years before the first year of that 15 year period.

ExampleYou received your green card in 1995.Ignore your visa status (as a lawful permanent resident) for 1995 through 2000. Also ignore your U.S. income tax returns for 1995 through 2000.

Add One

If you are a green card holder for one day in a calendar year, you are a lawful permanent resident for that year. Remember the magic phrasing of IRC § 877(e)(2) asks whether you were a lawful permanent resident in a particular year. Merely having the visa for a day is sufficient to add one to your year count.First, go back to the day you received your green card. When did you sign the papers?Then, continue adding one to your total for each successive year until the current year (you presumably still have your green card).

ExampleYou received your green card in October, 2009.The first year you had a green card (and thus lawful permanent resident status) is 2009. That's one year.You still have your green card in 2016. So add one for 2010 through 2016. That's seven years.One plus seven is eight.

Subtract One

Next, you subtract one year for any year in which you (1) held a green card; and (2) filed a U.S. income tax return as a nonresident (Form 1040NR) by claiming that an income tax treaty made you a resident of another country and a nonresident of the United States (using Form 8833).Look at all of your U.S. income tax returns that you filed from the year that you received your green card until now. Do you see Form 1040NR as the income tax return? Is Form 8833 attached to your Form 1040NR?If yes, that year does not count toward the number of years you need to become a long-term resident for exit tax purposes.

ExampleAssume the same facts as the last example: you received your green card in October, 2009, and the current year is 2016.You look at your income tax return filed for 2009. You see that you elected to be a nonresident alien for income tax purposes and filed Form 1040NR. All of your other income tax returns are Form 1040--the resident's income tax return.Subtract one from your total.Eight years in which you were a lawful permanent resident (green card holder) minus one year in which you were taxed as a nonresident of the United States equals seven.

Now you know the answer: you were a lawful permanent resident (as defined by IRC § 877(e)(2)) in seven out of the last 15 years (ending with the current year, when you will be giving up your green card).

Result

By following the 1, 2, 3 steps described here, you can quickly decide whether you are a long-term resident or not. In the example I gave, you would not be a long-term resident because you filed a nonresident income tax return in your first year as a green card holder.

Planning

If you are a green card holder and you want to avoid the exit tax rules, your first level of defense should be to avoid long-term resident status.There are only two ways to avoid long-term resident status:

• Make an income tax treaty election (using Form 8833) to be taxed as a resident of another country; or
• Give up your green card before hitting the magic number eight.

For new immigrants: carefully watch your years in the United States. If the exit tax is a serious risk for you, you will want to abandon your green card in the seventh year after receiving your visa. As an alternative, you will want to move to another country (one that has a tax treaty with the USA) and make an election to be taxed as a resident of that country and a nonresident of the USA.Both of these points have serious life and tax consequences, so look (and get help to look again) before you make a leap.See you in a couple of weeks.Phil.