I am posting this comment of Gary Clueit that appeared on the Robert Wood article couple of days ago. Over the past few months, we have “met” Gary on FB, Twitter etc. Especially the Wednesday Tweet Rally- A group that just keeps on giving!!
by Gary Clueit
The article provides a good, if brief, overview of the perils and pitfalls of being a green card holder. The reality is somewhat bleaker.
As a long-term green card holder with no way to escape “covered expatriate” status should I decide the leave the US, I must point out a few of the other insidious side effects of being the holder of a residence permit.
If a green card holder were to decide to leave and relinquish his or her green card, here are some the issues they face in a bit more detail:
Determining the $2M net worth threshold does not cover any assets that the person might have had before ever moving to the US or assets received after taking up residence due to bequests from relatives that have never set foot in the US. The net worth amount signed into law in 2004 and was, I believe, related to the estate tax, despite being less than half the amount of the estate tax (which is indexed whereas the expatriation exit tax threshold is not). Anyone who has diligently saved for retirement and owned houses in San Francisco, Seattle or other major cities over the past dozen or so years can quite easily reach the $2M threshold. It does not make you “rich” by any stretch of the imagination. The non-indexed $2M figure simply appears to be a punitive amount designed to punish anyone for daring to want to leave the US.
Even after paying the exit tax on the “deemed sale” of everything you own worldwide, you will have to pay actual capital gains when you do actually sell since no tax treaty provides a credit for a deemed sale of anything. Outright double taxation. For example, if I own a house in Toronto and sell under normal conditions, I will pay capital gains tax on any profit in Canada. When filing my US tax return I will get a credit for the tax paid to Canada resulting in a single tax bite. However, if I own the Toronto property on the day of expatriation, the US taxes me on any paper profit. Since I have not actually sold the property, there is nothing to declare to Canada’s Revenue Agency (CRA) at that time. When I do eventually sell, CRA will then tax the actual profit, but there is no ability to get a credit from the IRS since expatriation is a terminating event.
After departure and payment of the exit tax, every penny of any bequest or gift you make to someone resident in the US (e.g. a child, grandchild or friend, even if they are not US citizens) is then further taxed at a flat 40%. Because this tax is imposed on the recipient, there is no opportunity to offset estate, wealth or inheritance taxes that might be imposed on the estate of the deceased person by another country even when there is a treaty in effect. Here is where it gets really interesting: assume your net worth is $2.5M on the date of expatriation, you pay the exit tax. Let us also assume that your wealth increases to $250M AFTER you leave the US due to hard work and good luck. If your heirs live in the US (again, whether citizens or not) and you leave all that wealth to them, the entire $250M estate will be taxable to them at 40% regardless of the fact that 99% of your wealth at the time of death was created outside the US and after you had ceased to be a resident. By what stretch of any imagination is this fair or equitable on either the expatriate or their US resident heirs?
Most foreign tax treaties contain tie-breaker clauses to prevent double taxation of those living abroad. However, if a green card holder is living overseas (on assignment, for example) and elects to use a tax treaty benefit to avoid double taxation, that in itself is considered an expatriating act.
I will point out that most of the above situations also apply to US citizens who decide to give up their citizenship, as well as to Accidental Americans who are compulsory citizens simply by being born in the US but who may never have lived, been educated in or worked in the country. The fundamental difference between the citizen and green card holder is that a citizen can only lose their citizenship through the proactive step of filing Form DS-4079. This might at least provide some ability to time events to minimize the tax consequences. A green card holder can voluntarily relinquish their card too. However, a green card holder may be denied re-entry into the US simply by staying out of the country for more than 1 year. Even a re-entry permit, applied for before leaving, is only valid for 2 years and is not be renewable. As a result, a 2 year and 1 month overseas assignment for a green card holder can result in refusal to enter upon return. You then have the alien(!) situation where you are not allowed to reside in the US by action of Customs and Border Protection, but are still considered a US resident by the IRS and still subject to FBAR, FATCA, PFIC, CFC filing requirements and taxation on your worldwide assets. Or at least until you explicitly relinquish the green card or the IRS finds out you are no longer living in the US at which point it becomes an involuntary expatriation and immediately invokes the expatriation regime and tax based on the date you were denied entry back into the US. Why is the ability to time any expatriation important? Take the case of your primary residence. If you plan to expatriate, you make sure you sell your house before that event to ensure that up to $250K profit is not taxable. If you are involuntarily expatriated for any reason, there is no tax break because you have not actually sold the house. The paper profit from the deemed sale will be added to your taxable base subject to the exit tax. When you do sell in the future, you may well be subject to tax on that profit from your new country of residence.
Even while a green card holder resides in the US, they are subject to discrimination. Besides never being allowed to vote (not really an issue since presumably one never desired to be a citizen), they are still expected to pay taxes on worldwide income (not really an issue either since almost every OECD country taxes worldwide income now). The real problems arise in estate planning: