The United States is one of the few (if not the only one) countries in the world which taxes its citizens and permanent residents on the basis of their worldwide income. As a result, U.S. permanent residents (and citizens) who decide to live and work outside of the U.S. on a temporary basis are normally required to declare and pay U.S. tax on their foreign income regardless of the source of such income. This is true whether or not the U.S. green card holder receives a Form W-2, 1099 or similar tax document. This article focuses on the tax filing of U.S. permanent residents and the immigration implications of their tax filings (or the lack thereof).
U.S. Permanent Residents Must File Tax Returns Even if Residing and Working Abroad
A U.S. citizen or, for the purpose of this article, permanent resident alien (green card holder) living or traveling outside the U.S., is generally required to file U.S. income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as those taxpayers residing in the United States.
The permanent resident is required to file a U.S. tax return if their gross income from worldwide sources is at least the amount shown for their filing status in the Filing Requirements table in Chapter 1 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. For example, for 2014, single taxpayers who have worldwide income from all sources in excess of $10,150 must file a tax return with the IRS. Factors such as taxpayer’s income, filing status, and age generally determine whether a permanent resident (regardless of residence or source of income) must file a tax return. Please review Publication 54 mentioned above for more details.
Gross Income Must be Declared
Now that we know that a U.S. green card holder living temporarily abroad must declare their worldwide income, the question is, What kind of income is included?
IRS requires that all income received in the form of money, goods, property, and services that is not exempt from tax be included and declared. In determining whether a U.S. permanent resident must file a tax return, the taxpayer must consider as gross income any income that was excluded as foreign earned income or as a foreign housing amount. If the taxpayer is self-employed (in the U.S. or abroad), their gross income includes the amount on the Gross Income line of Schedule C (Form 1040), Profit or Loss from Business, or the Gross Receipts line of Schedule C-EZ (Form 1040), Net Profit from Business.
Foreign Bank and Financial Accounts Disclosure Required
Additionally, FinCEN Report 114, Report of Foreign Bank and Financial Accounts (“FBAR”) (formerly TD F 90-22.1), must be filed if a taxpayer has had a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country, the value of which exceeds $10,000. A report is not required if the assets are with a U.S. military banking facility operated by a U.S. financial institution or if the combined assets in the account(s) are $10,000 or less during the entire year.
Foreign Earned Income Exclusion and Foreign Housing Exclusion and Deduction
As discussed herein, U.S. citizen and U.S. permanent residents living abroad are taxed on their worldwide income. However, they may qualify to exclude from income up to $99,200 of their foreign earnings. In addition, they can exclude or deduct certain foreign housing amounts.
There are certain eligibility requirements for these exclusions and deductions so a tax professional’s help may be required. We should caution, however, that from immigration standpoint, a U.S. permanent resident’s use of such exclusions may be an indication that the taxpayer is not maintaining their U.S. residence during the tax period in question – therefore, preventing or at least delaying a possible U.S. naturalization application.
Timing of Tax Return Filing
U.S. citizen or green card holders (and certainly military members) who are residing overseas are allowed an automatic 2-month extension to file their tax return and pay any amount due without requesting an extension. For a calendar year tax return, the automatic 2-month extension is June 15. If the taxpayer qualifies for this 2-month extension, penalties for paying any tax late are assessed from the 2-month extended due date of the payment (June 15 for calendar year taxpayers). However, even if the taxpayer is allowed an extension, the taxpayer will have to pay interest on any tax not paid by the regular due date of the tax return (April 15 for calendar year taxpayers).
U.S. Permanent Residents’ Tax Obligations and Immigration
The filing requirements outlined above, especially as they are applicable to U.S. permanent residents, have important (and often overlooked) implications with respect to immigration. Most frequently, the issues arise in the context of an application for a reentry permit or for naturalization application to become a U.S. citizen.
I-131 Reentry Permit Applications
Permanent residents who are spending an extended period of time abroad often apply for and obtain a reentry permit which allows them to spend an extended period of time abroad without losing their green card. The reentry permit application seeks to establish the permanent resident applicant’s compliance with the U.S. tax laws, and specifically to determine whether the permanent resident applicant has filed U.S. taxes as a non-resident OR if they have not filed U.S. taxes because they considered themselves as non-residents.
It is important to note that sometimes, as described in this article, U.S. permanent residents residing abroad and deriving foreign income may not have to file for a U.S. tax return (for example, as mentioned above, if the permanent resident is single and has less than $10,150 then they may not even have to file a tax return). However, if the permanent resident derives worldwide income requiring them to file a tax return, the U.S. government would expect that such tax return be filed as a U.S. permanent resident.
If a U.S. permanent resident has filed a U.S. tax return as a non-resident or if a tax return was not filed because the U.S. permanent resident considered themselves to be a non-resident for tax purposes, a reentry permit application may face significant scrutiny or even a denial. Our office will be happy to assist in evaluating reentry permit applications and any associated risks.
N-400 Naturalization Application to Become a U.S. Citizen
The issue of payment of taxes on foreign income makes often makes an appearance in U.S. citizenship applications, N-400. One of the relevant requirements for qualifying for U.S. citizenship is that the U.S. permanent resident applicant must have resided in the U.S. for the last five (three in certain cases of immediate relatives to U.S. citizens) years.
In certain situations, especially when the U.S. permanent resident applicant has spent considerable period of time outside of the U.S., tax returns for the last five years may have to be submitted with the N-400 citizenship application. If the immigration service sees foreign income exclusion on the tax return for one of the recent years they may conclude that claiming such exclusion was done because the permanent resident applicant has spent considerable period of time abroad and is claiming their tax home to be that of a different country. This, the U.S. immigration service may conclude, is an indication that the U.S. permanent resident applicant has not been maintaining U.S. residency for tax and, more importantly, for U.S. citizenship application purposes and deny the N-400 citizenship application.
To be clear, claiming foreign income exclusion does not automatically prevent a U.S. citizenship application from being approved; however, it increases the risk of scrutiny and/or denial. Our office will be happy to assist in evaluating U.S. citizenship applications and any associated risks.
The purpose of this article is to correct a possible misconception that U.S. permanent residents who work abroad do not have to pay U.S. taxes. This is not true. As discussed above, U.S. citizens and permanent residents must declare all worldwide income in their tax filings. Subject to certain limited exceptions, tax returns should still be filed by U.S. citizens and permanent residents living and working abroad.
Our office is ready and available to help U.S. permanent residents understand how their tax payment history may affect their U.S. reentry permit or U.S. citizenship applications. Our office has a special reentry permit division where we handle reentry permits on a daily basis for a variety of green card applicant situations and we will be delighted to discuss and, possibly, help throughout the application process. Please do not hesitate to contact us with any questions or comments, or if we can be of any assistance with this or related immigration-related issues. We invite you to subscribe to our free weekly immigration newsletter to receive timely updates on this and related topics.
Please note that this is not legal advice and please also note that our practice is limited to U.S. immigration law. We handle U.S. immigration matters (such as reentry permit, naturalization applications and many more) but we do not handle tax issues or questions. We suggest you contact a CPA or a tax attorney for any questions pertaining to U.S. tax laws.