Guide to Taxation for Current and Potential Green Card Holders

green card

The Taxation side of the Green Card Story

If you think cryptocurrency is the most coveted commodity in the world right now, think again. It’s not. It is the Green card, also known as the Permanent Resident Card. And as long as the US is dominating the world economy and providing numerous opportunities for lifestyle betterment, it is always going to be the Green card. The authority to live permanently and work permanently in the US, being one step closer to obtaining its citizenship, is a lot more attractive than holding BitCoin or Dogecoin.

Holding a green card comes with a ton of advantages, like the ease of travel, the ability to sponsor relatives for visas, eligibility for local tuition. But it also comes with an equal share of rigorous rules, laws and regulations that the cardholder is expected to follow to the letter, like registering for selective service in the military, supporting the democratic form of government, filing income tax returns, reporting income to the US internal revenue service (IRS).

Tax planning before moving to the US on a Green Card

Taxation is often a point of concern and apprehension, no matter which country you live in. The taxpayer will be taxed by the federal government and the state government separately. The federal government levies Income Tax, and Estate Tax and Gift Tax. So, tax planning before you get the Green card can take the edge off your liabilities and help you optimize your finances. There may be a lot of tax consequences if planning is not done properly and with diligence, and these negative consequences are higher than any planning costs. You might end up paying a lot more than you could potentially be saving. Hence, it would be prudent to invest to plan properly beforehand. Pay heed that “tax planning” is not in any way considered to be “tax evasion”.

One way to avoid paying excess tax on the appreciation of the value of an asset is by using a method that has no repercussions in India, as it is considered a sale for US tax purposes. In this method, the purchase value of the asset should be increased to the market value right before making a move to the US on a green card. This will eradicate any possible taxation on an appreciation that happened before the move. A proper appraisal of the asset needs to be done. This appraisal is not revealed to the US government as it is not considered a sale by them. The US government doesn’t ask for any raw data and needs information to be furnished only as asked in the forms by them.

Let’s say a certain Mr Roy purchased a property worth `30 lacs (~$40,000) a few years ago, which has now appreciated to `75 lacs (~ $100,000). Before he leaves for the US on a green card, he gets the value of his property appraised to the market value. After he moves to the US, he sells the property at $150,000. The Long Term Capital Gains tax of 20% that he pays, will amount to $10,000. If Mr Roy hadn’t been wise and done his tax planning, he would have had to pay an LTCG tax of $22,000. Owing to the fact that he did some tax planning before he made the move, he has essentially saved $12,000.

If a person owns a corporation in India that is taxed heavily in India, and then again taxed in US when he receives his dividends, he can elect to treat his corporation simply as a flow-through unit for US tax purposes. Flow-through units are common legal devices used to avoid double taxation.

Assume a Mr. Sharma owns a corporation in India where he pays 40% in taxes. Before moving to the US on a green card, he elects to treat his corporation as a flow-through unit for US tax purposes. He will, henceforth, in the US, be personally taxed whenever his corporation makes any earnings, and not be taxed when he gets them as dividends. After his move, his corporation earns $1 million. He has to pay $400,000 in taxes in India (40%). In the US he will owe $370,000 (37% for individuals). But, because he has already paid 40% in India, he can avoid double taxation and has $30,000 in foreign tax credit that he can use later. This is possible because the US has a Double Taxation Avoidance Agreement with India

If Mr. Sharma hadn’t done this planning, he would have had to again pay tax on the dividend he receives in USi.e. he would have to pay $222,000 (37% of the dividend $600,000) over and above the corporate tax he paid in India. So he would be paying total taxes of $622,000 for earnings of $1 million.

It is also suggested that you do not own shares in a PFIC (Passive Foreign Investment Companies – Mutual funds managed outside the US) as it is taxed rather heavily, needs additional reporting and is usually discouraged.

Similarly, various other steps need to be taken with the help of a professional tax advisor to minimize your liabilities, for example- setting up Off-shore trust for succession.

Tax implications for new Green Cardholders

Once you get a Green Card, as a taxpayer you will be treated on the same lines as a citizen of the US. Your obligations towards the US treasury and the IRS start on the day you land in the US. The deductions and credits that a US citizen claims, can be claimed by you- a green card holder- as well. Form 1116 must be filed along with Form 1040 to claim foreign tax credits.

April 15 of the following year is the date that you must remember at all costs! All pending taxes and returns must be paid and returns must be filed before this date.

Long term gains and short term gains based on transactions after you move to the US will be taxable even if done on Day 1 of your residence.

If you have a life insurance policy that does not meet the requirements and definition of a life insurance policy in the US, then you will not receive any tax benefits. Moreover, you may be taxed heavily as if it were a PFIC.

As mentioned before, if you still own shares in a PFIC, you will have some additional reporting to do.

Reporting requirements on worldwide income

You will have to pay your tax on your income, whether it is passive or active, accrued worldwide i.e. any income that you receive on any asset in any country, not just India, will require you to report it and pay relevant taxes.

Bank accounts being held outside the US jurisdiction must be reported by filing Form FinCEN 114 if the total value of your account(s) is more than $10,000 at any given point in the calendar year. This includes personal accounts and any accounts you have signature authority over.

According to Foreign Account Tax Compliance Act (FATCA), Form 8938 needs to be submitted if your assets overshoot a certain threshold. The threshold depends on whether you are married or unmarried, file taxes with your partner or separately.

If taxes are paid outside the US as well, then you can claim foreign tax credit to offset your tax liabilities. The credit can be carried over and used in the subsequent years as well.

Coming to retirement payments, payments done by the Indian government is not taxable. But, if the retirement payment is done by a private entity, it is taxable. The brighter side to this is that credits can be claimed here as well.

Consequences of non-compliance

If the tax laws and requirements are not adhered to, there are punitive repercussions. The federal government can impose criminal liabilities, civil penalties and can also compulsorily collect the tax amount. You may be fined, or imprisoned too.

The worst-case scenario is that your Green card will be revoked and you will be removed from the US.

Even if no prosecution is started against you, it will hinder your process to become a US citizen. Apart from not filing taxes, misfiling of taxes and furnishing incorrect information is also a punishable offence, although it carries a less severe punishment.

Holding a Green card, living the American Dream, is not just a privilege given to you, it’s a responsibility that must be upheld and an opportunity that must not be misused. Complying with the tax norms might seem very nerve-wracking at first, but that is not a reason to evade them and escape authorities. Consult and use the services of competent tax advisors who will help you along the way in not just filing taxes, but also optimizing them in a way that’s beneficial to you.