Legal Permanent Residency/ Green Card: Tax Issues
Foreign nationals seeking legal permanent residency (LPR Status or a Green Card) through the PERM process, other employment based petitions or through the various family based avenues will inevitably face various tax issues. All foreign nationals applying for such status must abide by certain federal regulations and burdens of proof addressing the tax issue. As the deadline for filing personal income tax returns bears down upon all persons who derive income from the United States, now is an opportune time to discuss some of the common issues that Green Card applicants and Legal Permanent Residents face.
Required Taxation Evidence Submitted with the I-485 application
All Green Card applications require proof of whether or not the alien was taxable in the previous three years. The federal regulations state that the alien must provide proof of whether or not he or she was required to file an income tax return for the past three tax years. Certain visa holders are free from from this requirement when filing an application for adjustment of status. Visa holders that may not need to pay US income tax include J, H-4, H-3 and F visa holders as long as they have received no gross income from within the United States.
Who is to be taxed?
Everyone who derives income from sources within the United States will be taxed. Foreign nationals are either taxed as an alien resident or non-resident alien basis. Resident aliens are taxed on all income that is derived from any source around the world, just like any US citizen would be. Non-resident aliens are only taxed on income that they have gained from sources within the United States.
How do I tell if I will be taxed as a resident or nonresident alien?
The IRS has formulated a test to determine whether or not an alien is a resident alien for tax purposes. This test is called the Green Card Test or the Substantial Presence Test. In most instances, a foreign national who is present in the United States for 183 days out of the year will meet the Green Card test and will be taxed as a United States Citizen would be. A foreign national may also meet the Green Card test and be considered taxable as a United States Citizen if he or she is present in the US for 31 days of the tax year, and has been present in the US for one-third of the days in the previous tax year and one-sixth of the days of the second most recent tax year.
Some days of presence in the United States are not counted toward the Green Card test. Some visa holders are exempt from paying US taxes such as F, J, M and Q visa holders, so usually days spent in the United States on these types of visas are no counted toward the Green Card test. Some visa holders that can be present in the United States for an indefinite period of time are also not liable such as A and G visa holders. Persons who are physically incapable of leaving the US or persons go back and forth to work in the US from Canada and Mexico are usually not taxable in the same manner as nonresidents. Also foreign nationals who are only in the US temporary, using the US as a stopping point while they travel between two locations outside of the US, will not have these days counted in the Green Card test.
Finally, even if the alien meets the Green Card Test, he or she will not be taxed as a US resident if it is shown that the foreign national was not within the US for 183 days in the most recent tax year and that the alien keeps a home in a foreign country, to which country the alien maintains a nearer relationship than he or she has to the United States.
What if I am a dual citizen?
The United States maintains certain tax treaties with other nations. A dual citizen may be able to show non-residency by providing the treaty and citing to the section of the treaty regarding residency. Two specific countries do not address this issue in their treaties with the US; Greece and Pakistan.
Estate Tax Issues for Foreign Nationals who Pass Away in the United States
The rate of estate taxation also depends on whether the alien is considered a resident or nonresident alien. The residency test for estate tax purposes is different that the test for income tax purposes. Specifically, a deceased person is considered a nonresident if that person was neither a citizen nor a resident of the United States. Residency for estate tax purposes is determined based on the persons’ domicile (where the person lives daily).
The property owned by a non-resident within the United States is subject to a transfer tax, the same as US citizens. Foreign nationals who are residents are subject to the same estate tax rules that US citizens must meet. For both nonresidents and residents, an unrestricted spouse deduction is available for property that passes to a US citizen spouse. However, if the spouse is not a US citizen, there is no marital deduction unless the property passes to a special type of trust. A marital deduction may be available to non-residents if they are citizens of a country that has a tax treaty with the United States.
Whether you are a US Citizen, Green Card holder or non-resident alien, taxes are ubiquitous. Knowing when you are subject to taxation and at what rate is vital to maintaining credibility between a foreign national and the United States government. Each case presents different facts, so please consult with a liscensed attorney if you think that you may have any issues relating to your LPR status.
If you have questions about an immigration visa or green card matter, and/or you need help in an immigration process, please contact our immigration attorneys or call The Law Firm of Shihab & Associates Co., LPA at the nearest office close to you to consult with an attorney. Our law firm handles various matters including Green Cards and Permanent Residence, family immigration, immigrant visas, non-immigrant visas, employment visas and H1B visas, Investor Visas, PERM applications, and many more. Please contact us and experience how our law firm can assist you in your immigration matters. Whether you are an employer, an employee or a family member, The Law Firm of Shihab & Associates, Co., LPA has competent, responsive and innovative lawyers who can make your immigration experience pleasant and seamless.