If you received your green card visa in 2011 and you are thinking about terminating your permanent resident status, do it in 2017 if you want to avoid the exit tax entirely.
If you hold green card status for at least eight years and then want to leave the United States, the exit tax rules will apply to you.
The result may not be painful, but it is better to avoid the exit tax rules entirely if you plan to leave the United States anyway.
If you received your green card in 2011, you have held the permanent resident status in seven years already: 2011 through 2017 inclusive.
If, on January 1, 2018, you still have that green card, then you will have hit the magic “eight years” requirement. The exit tax rules will apply to you.
The exit tax rules only apply to “expatriates”. If you are not an expatriate, then it is impossible for the paperwork and tax rules to apply to you.
An “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 [Internal Revenue Code] section 7701(b)(6).”1
If you are never a “long-term resident” then you cannot cease to be a long-term resident. If you cannot cease to be a long-term resident, you cannot be an expatriate. If you cannot be an expatriate, you cannot be subjected to the exit tax rules.
A “long-term resident” is someone who is a lawful permanent resident for a long time:2
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 the event described in subparagraph (A) or (B) of paragraph (1) occurs. 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.3
Those words “the event described in subparagraph (A) or (B) of paragraph (1)” just means the year you terminate your green card visa.
Internal Revenue Code Section 877(e)(2) just means that if you were a “lawful permanent resident” (translation: you had that visa status, and we colloquially refer to this visa as a green card), and if you had it long enough, then you are a “long-term resident.”
Just to follow the logic thread to its conclusion, here is how we know what “lawful permanent resident” means.
For exit tax purposes, this phrase has the same meaning as given in Internal Revenue Code Section 7701(b)(6):4
(A) such individual 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
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
If you have been “lawfully accorded the privilege of residing permanently in the United States as an immigrant”, you have a green card.
Become an immigrant by getting the correct visa status — to reside permanently in the United States. You are a “lawful permanent resident”.
Keep that status (a lawful permanent resident) long enough, and you become a “long-term resident”.
Stop being a lawful permanent resident after you have become a long-term resident, and you are an “expatriate”.
And if you are an expatriate, you need to worry about the exit tax rules.
Eight years has an unusual meaning. Eight years can be as little time as six calendar years and two days.
The magic concept is “in” eight of the fifteen years ending with the expatriation year. And that “in” means “a moment in time”.
“In eight of the fifteen years” ending with the expatriation year does not mean “a continuous period of time that counts up to 8 years of duration.
You count the years by determining if you were a lawful permanent resident for at least a moment in time during a calendar year. Remember that a lawful permanent resident is someone who has had the visa status5 and that visa status has not been revoked.6
If the United States admitted you as a lawful permanent resident on December 30, 2011, then you held the lawful permanent resident status for two days during 2011, and that is one year toward the magic eight years that will qualify you for the exit tax.
This means that for people who immigrated to the United States and received their permanent resident visa in 2011, the calendar year 2017 is the year for a big decision:
If you decide that 2017 is the year to drop your green card, here is how to do it: file Form I-407 before December 31, 2017.
By filing Form I-407, you voluntarily abandon your permanent resident status. This causes you to cease being a “lawful permanent resident” for tax purposes.7 The effective date is the day that you hand Form I-407 to a consular official.8
You can mail Form I-407 as well, and your effective date is the date of mailing by certified mail, return receipt requested.9 While this will work if absolutely necessary, I do not recommend it. It is always better to have proof of the date of filing, and doing this in person is the best way to get that proof.
There is a wrinkle for the year-counting rule that makes you a long-term resident.
Before you are a long-term resident, you do not count, as one of the eight out of fifteen years, any calendar year during which you made an election to be a nonresident of the United States for income tax purposes.10
The way to do this is to use an income tax treaty between your country of residence and the United States. Make that election on Form 8833 filed with the IRS.
After you become a long-term resident, making an election (using a treaty) to be a nonresident of the United States will be an expatriation event, making you an expatriate, subject to the exit tax rules.
Expatriation occurs when a long-term resident ceases to be a lawful permament resident.11
Making an election under a treaty causes you to stop being a lawful permanent resident:
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.12
Telling the IRS that you want to be a nonresident for income tax purposes may cause problems when you want to renew your green card. Make this decision with care.
If you became a lawful permanent resident in 2011 (i.e., got your green card status then), you will be a “long-term resident” in 2018, and if you later leave the United States you will have to deal with the exit tax rules.
The only exception is for people who, between 2011 and 2017, filed a nonresident income tax return (For 1040NR) with Form 8833 attached, claiming U.S. nonresident status for income tax purposes.
If you are planning to leave the United States anyway, consider filing Form I-407 before December 31, 2017 to eliminate exit tax problems.
The same is true for green card holders who have already left the United States but have not filed Form I-407. This might be the year to do it.