How Permanent Resident Income is Taxed
Some of the most complicated IRS tax rules involve lawful permanent residents — otherwise referred to as Green Card Holders and the US tax implications of being a permanent resident. What makes tax law involving green card holders so complex, is that even though green card holders are not US citizens of the United States — they are still considered a US Person for tax purposes (aka a Legal Tax Resident). Technically, a Green Card Holder is a Citizen of a foreign country — but maintains the right to permanently reside in the United States (as long as they meet the annual physical residency requirements). And, once a foreign person becomes a Green Card Holder (absent a Form 8833 election if it is a treaty country), the permanent resident becomes subject to US tax on their worldwide income similar to a US citizen. That is the case whether or not they reside in the United States. Let’s review the basics about how Green Card Holders are subject to US tax and have to file US tax returns.
US Tax Systems Basics & Green Card Holders
The United States follows a Citizen-Based Taxation *(CBT) Tax Model. Right off the bat, this is a misnomer — because in actuality the US follows a US Person-based tax system. As a result, all US persons are subject to US tax on their worldwide income. It does not matter if the US Person resides outside the United States — and it does not matter if the income is generated from sources within the United States or sources outside of the United States — they are still subject to US Tax. For example, Drew is a permanent resident who resides outside of the United States in a foreign country. In addition, all of his income is foreign-sourced. Nevertheless, Drew must file a US tax return to report his worldwide income — because he is considered a US person.
Foreign Tax-exempt Income is Usually Taxable
Especially in Asian countries, it is very common for Passive Income (such as dividends, interest, capital gains or royalties) to be non-taxable in that country. For example, a foreign non-resident alien who earns all of their foreign passive income from an Asian Foreign Financial Institution is not (usually) taxed on the interest, dividends, or capital gains (exceptions apply). But if that same person is actually a lawful permanent resident who resides overseas (not taking into consideration the Green Card 6-month residence requirement), then they are subject to US tax on that income — making matters worse, is that since they did not pay any tax abroad — they will not have any foreign tax credits to apply, to reduce their US tax liability.
Expired Green Card & US Tax
This is where it gets a bit more complicated. …….