Tax Traps for the Unwary – U.S. Green Card Holders

The following is a brief explanation of the fairly complex U.S. tax rules for U.S. Green Card holders.

General Rules

In general, U.S. Green Card holders are treated as residents for U.S. income tax purposes and are subject to tax on their world-wide income because they are admitted as lawful permanent residents of the U.S.—this is no different than taxation of U.S. citizens.  As such, a Green Card holder is required to report compensation, interest, dividends, and other income from foreign sources on their U.S. tax return (as well as their U.S. source income).  If the foreign source income is taxed in the foreign country, the taxpayer will incur double tax on the foreign source income.  All is not lost though, there may be an opportunity to reduce or eliminate the double taxation by using the U.S. foreign tax credit.

Rules for Dual-Resident Taxpayers

In certain instances, U.S. Green Card holders are also treated as residents of their country of origin.  If so, and their country of origin is a country that has an income tax treaty with the U.S., they may not be subject to tax as a resident of the U.S.  Instead, if they meet the treaty’s “tie-breaker” rule, they are treated as nonresident aliens for U.S. tax purposes.  As such, they do not have to pay tax in the U.S. on their foreign income, but they will be required to file a U.S. tax return form 1040NR.  So, even if the Green Card holder has minimal contact with the U.S. during the year, they have a U.S. tax filing obligation.  Furthermore, the Regulations governing this area of the law indicate that a Green Card holder that does not comply with the filing of a 1040NR (and other treaty disclosure requirements) under the dual-residence status rules may jeopardize their Green Card status.

In summary, the U.S. taxation of Green Card holders is extremely complicated and fraught with traps for the unwary.  If you or one of your clients is a Green Card holder please seek the assistance of specialized legal and tax professionals.

Samuel L. Hemmeter, CPA, MT