Treaty Elections, Long-Term Resident Status, and ExpatriationJuly 31, 2018 - Debra RuddExpatriation
The impact of treaty elections on long-term resident status and expatriation
Over the course of two days last week, I received three questions about the interaction of treaty elections, long-term resident status, and expatriation.
It seems there exists some confusion about what happens when a lawful permanent resident makes a treaty election to be taxed as a resident of another country: Does it cause you to expatriate? Does it prevent you from becoming an expatriate?
I am not surprised this confusion exists. Depending on when the treaty election is made, it could either cause you to expatriate or prevent you from becoming an expatriate.
Today I will explore what it means to be an expatriate, what it means to be a long-term resident, and how you can use treaty elections to toggle either of those statuses.
Expatriation – who can do it, and how
There are two groups of people who can become expatriates:1
- US citizens, and
- Long-term residents.
US citizens become expatriates when they terminate their US citizenship or the US government takes it away.
Long-term residents become expatriates when they terminate their lawful permanent resident status, or when the US government terminates it (but interestingly, not when their green cards expire).
Definitions – citizen and long-term resident
You typically know if you are a US citizen. You were either born in the US or naturalized.
It is less easy to know if you are a long-term resident. There are two factors that must both be satisfied for you to be a long-term resident:2
- Lawful permanent resident (green card) status, plus
- Having that status “in” at least 8 of the last 15 years.
The use of the word “in” rather than “for” indicates that if you have a green card “in” any given calendar year, even for just one day in that year, that year counts as a full year toward the 8-year test.
Once you become a long-term resident, terminating your permanent residency results in expatriation.3 If you never become a long-term resident, terminating your permanent residency is a non-event for expatriation purposes.
It is important for green card holders to carefully track their status with respect to the long-term resident test so that they know whether terminating their permanent residency will result in expatriation.
How to apply the long-term resident test
Look at the last 15 calendar years, including the current year. Right now it is 2018. That means the 15-year period to look at is 2004-2018.
If you were a lawful permanent resident in any 8 of those 15 years, you are a long-term resident.
Don’t count treaty election years
You may not need to count all of your permanent resident years toward the long-term resident test.
For any year that you have made a treaty election to be taxed as a nonresident of the US, you can omit that year from your count:4
[For purposes of the long-term resident test,] 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.
For example, let’s say you got your green card in 2009. You filed resident returns for 2009-2013, which is 5 years. In 2014-2016, you had a tax home in a treaty country and made a valid treaty election to be taxed as a resident of that other country (and as a nonresident of the US).
Before you file your 2017 return, you have 5 years toward the 8-year long-term resident test, and 3 years that do not count toward that test because you made a treaty election to be taxed as a resident of another country for those years.
If you are eligible to make the treaty election again on your 2017 tax return, you could do so. If you make the treaty election, your long-term resident count will still be at 5 years; if you do not, it will increase to 6 years.
In neither case will you be a long-term resident after filing your 2017 return.
Don’t accidentally expatriate yourself by treaty election
The treaty election functions to prevent years from being counted toward the long-term resident test as long as you have not yet met that test. But once you qualify as a long-term resident, the treaty election works quite differently.
Let us use the same example as before, but we will change the facts slightly. Let’s say you got your green card in 2009 and filed your US return as a resident each year 2009-2016.
Before you file your 2017 return, you have 8 years toward the 8-year long-term resident test. You are a long-term resident.
If you make a treaty election to be taxed as a resident of another country (and as a nonresident of the US) on your 2017 return, that will be an act of expatriation.
Making the treaty election serves as an act of terminating lawful permanent residency:5
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 termination of lawful permanent residency, once you have met the 8-year long-term resident test, is an act of expatriation:6
The term “expatriate” means, in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
The impact of making a treaty election to be taxed as a resident of another country (and as a nonresident of the US) depends entirely on whether you have already met the 8-year count for the long-term resident test at the time that you are making the treaty election.
If you make the treaty election BEFORE you have 8 years of the last 15 as a lawful permanent resident (excluding treaty election years), the treaty election will serve to prevent the year for which you make the election from counting toward the long-term resident test.
If you make the treaty election AFTER you have 8 years of the last 15 as a lawful permanent resident (excluding treaty election years), you are a long-term resident and the treaty election will serve as an act of expatriation.
Be careful and make sure you know which category you are in before you make the treaty election.