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Exit Tax Book Chapter 3: How a Green Card Holder Becomes an Expatriate
Phil Hodgen
Attorney, Principal
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Last month, I talked about citizens and how they can renounce their US citizenship. This month, I am focusing on another group of people who can become expatriates, known as long-term residents.
“Long-term resident” is a special term under US tax law. It looks and sounds very similar to “lawful permanent resident”, which is a term that is used to describe a type of US immigration status.
Everyone who has the immigration status of being a lawful permanent resident is automatically a US resident for tax purposes, and must pay tax on their worldwide income. Someone who has had that status for “too long” (as defined by the Internal Revenue Code) becomes a long-term resident.
It is the status of being a long-term resident that matters for expatriation purposes: If you are a long-term resident, you become an expatriate when you terminate your US visa, and you can be subject to the exit tax when you expatriate.
If you are a lawful permanent resident who is not a long-term resident, you cannot become an expatriate. When you terminate your US visa, there is no expatriation event.
In this month’s issue, I will examine what it means to be a long-term resident, potential ways to avoid becoming a long-term resident, and how long-term residents become expatriates.
Who are long-term residents?
A long-term resident is defined as:1
Any individual (other than a citizen of the United States) 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 [he or she ceases to be a lawful permanent resident of the United States].
Essentially, it is someone who is a lawful permanent resident for a certain length of time. If you prefer to think of things mathematically, the equation looks like this:
Lawful permanent resident + “too long” = long-term resident
First, let’s look at what it means to be a lawful permanent resident. Then we will examine the time criteria – including ways to have years not count toward the test, and how some people “accidentally” expatriate.
Lawful permanent resident
A lawful permanent resident is defined in the Internal Revenue Code as:2
[an] individual [who] has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
The tax law refers to the immigration law definition of a lawful permanent resident.
This status is commonly referred to by most people as having a green card. The green card is proof of the lawful permanent resident status.
I will use the informal terminology here, as well, and refer to lawful permanent residents as “green card holders” to help avoid confusion between the terms lawful permanent resident and long-term resident.
In at least eight of the last fifteen years
To be a long-term resident, a green card holder must have their green card in at least eight of the last fifteen years ending in the year in which the green card is terminated.
That means you look at the year that you plan to terminate the green card plus the fourteen years before that. If you had a green card “in” eight of those fifteen total years, then you are a long-term resident.
The use of the word “in” rather than “for” means that if you have the green card for even a single day in a year, that year counts as one year in the eight-year test.
Example eight-year test
Let us use an example to illustrate how the use of “in” affects how you count the years. Assume someone gets their green card on December 20, 2010. They still have it today in 2019.
2010 counts as the first “year” in the test, because they had the green card “in” 2010. Counting the years, we have 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, and 2019. 2019 also counts as a year, even though the full year has not passed, because the person in our example still has their green card “in” 2019.
That is ten years toward the eight-year test, so this person in our example would be a long-term resident if they terminate the green card in 2019.
If the language in the Code had said “for” rather than “in”, I would take that to mean that you start the year count on the exact date you receive the green card, and each time that date rolls around again, you add another year to the count. But it does not say that, so we instead count each year as a full year where the person has the green card “in” any part of that year.
The eight-year test does not have to include sequential years. This is evident from the fact that you look at a fifteen-year period to see whether the eight-year test is satisfied.
It may be possible – depending on the specifics of your situation – for certain years during the fifteen-year period to not count toward the test.
How to make years not count toward the eight-year test
There are a couple ways to make years during the fifteen-year period not count toward the test:
- Do not have a green card for the entire year, or
- Make a treaty election to be taxed as a resident of another country for the entire year.
The first one is fairly self-evident: Any year in which you do not have a green card at all will not count toward the eight-year test. If you have a green card and terminate it in the fifth year you have it, then spend five years as a nonresident alien, then get a green card again, the five nonresident alien years in between will be years that don’t count toward the eight-year test.
Using treaty elections to toggle years
The treaty election option is a little more complicated.
The authority for using a treaty election to prevent a year where you have a green card from counting toward the eight-year test comes from the same paragraph as the long-term resident definition quoted earlier. After describing the eight-year test, that paragraph goes on to say:3
For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.
To make a treaty election to be taxed as a resident of another country, you must be eligible to make the treaty election under the dual resident tiebreaker rules, and the country other than the US in which you are claiming residence must have a tax treaty with the US.
For example, if you are a dual resident of the US and Singapore, you will not be able to make the treaty election, because Singapore does not have a tax treaty with the US.
For your treaty election to be successful at preventing a year from counting toward the eight-year test, you must make the treaty election for the entire tax year. Otherwise you will be considered to have your green card “in” that year, and it will count toward the long-term resident test.
Beware of accidental expatriation
Before making treaty elections to toggle years on or off for the long-term resident test, it is important to be aware of one very critical distinction:
If you make the treaty election BEFORE you have already met the eight-year test, it causes that year to not count toward the test.
On the other hand, if you make the treaty election AFTER you have already met the eight-year test, it is an act of expatriation.
The reasons why this is true are discussed in a later section, under how long-term residents expatriate.
Use the rules to pre-plan your exit
Some clients we have worked with have been able to pre-plan to avoid being long-term residents by carefully managing their tax residency and using treaty elections to toggle years on or off for the long-term resident test. Then, when they ultimately give up their green cards, they do not have to be concerned about being expatriates, because they never became long-term residents.
Those who cannot engineer their lives so carefully – in other words, people who become long-term residents – will become expatriates when they terminate their green cards.
How a long-term resident becomes an expatriate
You can terminate your green card voluntarily, or it can be terminated for you, typically involuntarily. A green card may also be terminated by treaty election. But allowing it to expire does not count as a termination for tax purposes, somewhat counterintuitively.
If your green card is terminated by any of the methods described below, and you met the “in at least eight of the last fifteen years” test for long-term residency, you will be an expatriate when the green card is terminated.
Voluntary abandonment of green card
The most common way to cease having a green card is to abandon it, which, if initiated by the individual green card holder, will result in what the Treasury Regulations call “administrative abandonment.”
Here is the procedure for abandoning your green card voluntarily:4
If the alien initiates this determination, resident status is considered to be abandoned when the individual's application for abandonment (INS Form I-407) or a letter stating the alien's intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or § 301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country's equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual.
Note that the regulations refer to the INS, a department of the US government that no longer exists. Now, the green card termination process is handled by USCIS – US Citizenship and Immigration Services. You will find the Form I-407 on the USCIS website.
The process for abandoning the green card is laid out in the quotation from the Regulations. You fill out Form I-407 or write a letter stating your intent to abandon your green card, enclose your green card with the form or the letter, and either deliver it in person or mail it to USCIS or a consulate.
Because there is a form created for this specific scenario, it makes sense to use that form rather than writing a letter, as it will require less thinking from the people who have to process it. That leaves less room for error, which is always a good thing when dealing with bureaucracy.
Judicial or administrative abandonment of green card (involuntary)
The green card can also be administratively or judicially determined to have been abandoned. If this happens, the determination of abandonment will be initiated by USCIS or a consular officer:5
If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.
If the green card is determined to have been abandoned in this way, the process is complete when there is no more possibility of judicial appeal.
Rescission of green card (involuntary)
This is slightly different than an administrative or judicial determination of abandonment, but the end result is the same. Your green card is no longer active at the end of the process. The Treasury Regulations do not have much to say about this process:6
Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual.
Again, at the end of this process, your ability to live in the US as a lawful permanent resident will be gone.
For our purposes the details of the immigration law are unimportant, since all the roads we are discussing here lead to the same result: you cease to be a lawful permanent resident of the US.
Termination – for tax purposes only – by treaty election
There is another way to terminate your green card that is somewhat counterintuitive: by making a treaty election to be taxed as a resident of another country under the tiebreaker rules. This is done by submitting a Form 8833 along with your income tax return, and not by interacting with USCIS or a consulate.
For tax purposes,7
An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.
Recall that a green card holder becomes an expatriate if they meet the test for long-term resident status and cease to be a green card holder:8
The term expatriate [includes] any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
If you are a long-term resident and you make a treaty election to be taxed as a resident of another country, then you cease to be treated as a lawful permanent resident of the US. That is an expatriation event.9
Recall that earlier I discussed the ability of green card holders to use treaty elections to toggle tax years on and off for the long-term resident test. That works, as long as you are not already a long-term resident: the treaty election serves to prevent that year from being counted toward the eight-year test. But if you have already met the eight-year test and THEN you make a treaty election, that treaty election will be an act of expatriation.
This is a weird result, because for immigration purposes you are still a green card holder and you still have all the rights accorded to a lawful permanent resident. But for tax purposes you are deemed to have expatriated, and you could be subject to the exit tax if you meet the criteria for being a covered expatriate.
Proceed cautiously when making treaty elections.
Lawful permanent resident status is not terminated for tax purposes if green card expires
A common belief – and an intuitive one – is that if you allow your green card to expire, you will cease to be a lawful permanent resident and you will be deemed to have expatriated as of the date of expatriation.
However, expiration of green card is not one of the items on the list that causes you to be an expatriate. You are only an expatriate if your green card is abandoned or revoked.
To abandon your green card, you must file Form I-407 or write a letter explaining that you wish to abandon it. To have your green card revoked, you must receive an administrative or judicial order stating that your green card has been revoked. When you allow you green card to expire, none of those things has happened, so you are not an expatriate.
That creates another weird result: You do not possess a valid green card for immigration purposes, but for tax purposes you remain a lawful permanent resident and must file tax returns to report your worldwide income. It is not until you abandon the green card or it is revoked that you can become an expatriate.
Conclusion
If you have your green card for “too long”, you become what the Internal Revenue Code calls a long-term resident. When you abandon your green card as a long-term resident (or it is taken away from you), you become an expatriate and might be subject to the exit tax.
Be aware of the weird rules surrounding treaty elections. If you elect to be taxed as a resident of another country under the tiebreaker rules and it is BEFORE you have become a long-term resident, that election serves to prevent that tax year from counting toward your long-term resident test. If you elect to be taxed as a resident of another country under the tiebreaker rules and it is AFTER you have become a long-term resident, that election serves as an act of expatriation.
Also remember that allowing your green card to expire does not constitute an act of expatriation, and although you have an expired green card, you are still a resident of the US for tax purposes until you terminate it. One misstep on this point could cause your status to flip from normal green card holder to long-term resident.
Thank you
As always, thank you for reading. The standard disclaimer applies: This is not tax advice to you. Do not rely on it as advice. Hire a competent professional if you need help.