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January 17, 2017 - Phil Hodgen

Treaty Election to Avoid Long-Term Resident Status

Green card holders, if they give up their visa status as a permanent resident of the United States, can be hammered by the exit tax. But not all green card holders are at risk—only if you are a long-term resident.

Avoid becoming a long-term resident and the exit tax rules simply do not apply to you.

Let us look at how a green card holder can use an income tax treaty to avoid being a long-term resident.

Green Card to Long-Term Resident to Expatriate

Receiving a green card (and setting foot in the United States) makes you a resident of the United States for income tax purposes.

If you are a green card holder for a long enough time, you are a long-term resident.

If, after you become a long-term resident, you make an election to be taxed as a nonresident of the United States for income tax purposes, you will be an expatriate, and the exit tax rules apply to you.

Eight Out of Fifteen

The amount of time you need to hold a green card in order to become a long-term resident is curiously defined:

“[T]he term “long-term resident” means 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 paragraph (1) occurs.”1

The ending year (in which “the event described in paragraph (1) occurs”) is the year in which the green card holder:

  • terminates his or her visa status (by abandonment or revocation), or
  • terminates U.S. resident status by making a treaty election to be a nonresident.

In other words, the last year of the 15-year time period is the expatriation year.

The Meaning of “In”

“In” simply means any moment in time during the year. Thus, receiving your green card on December 31, 2010 means you had the green card “in” that year, and that year counts as one of the eight years.

Similarly, if you file Form I-407 on January 2, 2017, you held a green card “in” 2017 and it also counts as one of the eight years.

Here is an example.

Example 1

If you received your green card at any time in 2010, and if you have not formally terminated the green card, then 2017 is your eighth year as a lawful permanent resident of the United States, and you are a long-term resident.

Green Card Status Counts Toward 8 of 15? Long-Term Resident?
2010 1 No
2011 2 No
2012 3 No
2013 4 No
2014 5 No
2015 6 No
2016 7 No
2017 8 Yes

When Years Do Not Count

You can make a year not count toward the “eight out of fifteen” requirement. You do that by using a special provision of an income tax treaty that your home country (where you are living now) has with the United States.2

“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

Here is an example.

Example 2

Let us pretend that in 2013 you were living outside the United States and you decided to file your U.S. tax return as a nonresident, claiming the power to do so under the terms of an income tax treaty between the United States and the country where you were living.

Green Card Status Counts Toward 8 of 15? Long-Term Resident?
2010 1 No
2011 2 No
2012 3 No
2013 Treaty No
2014 4 No
2015 5 No
2016 6 No
2017 7 No

Effective Use of the Treaty in the Last Year

Those of you with clever minds immediately see the possibility. What if you never used the income tax treaty election, and 2017 is the eighth year. You are a long-term resident already. Can you somehow use the income tax treaty strategy to prevent long-term resident status?

In other words, you want to leave the United States, cancel your green card, and not be a long-term resident. No exit tax problems! Here is what you are trying to achieve:

Example 3

Green Card Status Counts Toward 8 of 15? Long-Term Resident?
2010 1 No
2011 2 No
2012 3 No
2013 4 No
2014 5 No
2015 6 No
2016 7 No
2017 Treaty No

Remember, you want to avoid anything that makes you be a lawful permanent resident “in” 2017.

In order to figure out if you can do that, you will need to look at the ending date of your status as a lawful permanent resident. Here is what you need to know.

Terminating Lawful Permanent Resident Status

You will be terminating your status as a lawful permanent resident using the definition in the flush language of IRC § 7701(b)(6):

“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.”

You will be filing Form 8833 to notify the IRS (as a subdivision of the Department of the Treasury, because the reference to ‘the Secretary’ is a reference to the Treasury Secretary).

Residency Termination Date

Your “residency termination date” is:

“[T]he residency termination date for an alien who meets the green card test is the first day during the calendar year that the alien is no longer a lawful permanent resident if the individual establishes that, for the remainder of the calendar year, his or her tax home was in a foreign country and he or she maintained a closer connection to that foreign country than to the United States.”4

The first thing to notice is that your residency termination date is not necessarily January 1. It is the first day in the calendar year that you meet two criteria:

  • Your tax home is in a foreign country; and
  • You have a closer connection to that country than the United States.

“Tax home” and “closer connection” are terms of art in tax law. They do not necessarily mean what you think they mean, though they might.

Example 4

You are living in the United States through January 31, 2017. You leave the United States, move to Germany, and on February 10, 2017 you file Form I-407 to terminate your green card.

Your residency termination date is February 10, 2017.

This means that “in” 2017 you were a lawful permanent resident from January 1, 2017 through February 9, 2017. Since you were a lawful permanent resident “in” 2017, the year will count toward your eight years that qualify you for long-term resident status.

What if, in addition to filing Form I-407, you file a 2017 income tax return in the United States claiming to be a resident of Germany and a nonresident of the United States by virtue of the income tax treaty between the two countries? What is your residency termination date then?

Example 5

You are living in the United States through January 31, 2017. You leave the United States, move to Germany, and on February 10, 2017 you file Form I-407 to terminate your green card.

In 2018 you file your 2017 Form 1040NR with the Internal Revenue Service, claiming nonresident status in the United States because of the income tax treaty.

What is your residency termination date? Is it:

  • February 10, 2017, when you filed Form I-407 to give up your permanent resident visa?
  • The date that you “commenced to be treated” as a resident of the other country for tax purposes, as mandated by IRC § 7701(b)(6) and its dreadful flush language?

The answer, of course, the dreadful alternative. You must figure out the starting date of your residency status in your home country. And that may or may not be January 1, 2017.


  1. IRC §§ 877(e)(2), 877A(g)(5). 
  2. Thus, the first requirement for this strategy is that you live in a country that has an income tax treaty with the United States. 
  3. IRC §§ 877(e)(2), 877A(g)(5). 
  4. Regs. § 301.7701(b)-4(b)(2). Emphasis added. 

 

 

Expatriation