Green Card Exit Tax: What You Need to Know Before Renouncing U.S. Status
Understanding the Green Card Exit Tax
Not everyone who becomes a U.S. citizen or lawful permanent resident chooses to keep that status forever. Throughout history, individuals have permanently left the United States for many reasons—family obligations, political considerations, or simply the desire to return home. Those who decide to give up their U.S. status are known as expatriates. While the term may sound negative, expatriation is a perfectly normal and increasingly common decision.
However, for wealthier individuals, this decision may come with a significant financial consequence: the green card exit tax. The Internal Revenue Service (IRS) can impose this tax before you officially renounce your status.
What Is the Exit Tax?
The exit tax applies only to expatriates, which means you may fall under its rules if you:
- Renounce or lose U.S. citizenship (whether you were born a U.S. citizen or naturalized), or
- Give up your lawful permanent residence (green card) after maintaining it for a significant period of time.
If you only lived in the U.S. under a temporary nonimmigrant visa, such as an H-1B, you are not subject to the exit tax.
Once you qualify as an expatriate, the next step is determining whether you are considered a covered expatriate or a noncovered expatriate. This distinction is critical because only covered expatriates are subject to the green card exit tax.
In some situations, the IRS may tax you on up to 30% of your total net worth, as if you had sold all your assets at once and reported the gains as taxable income. Without proper planning, this can create serious financial challenges.
Covered vs. Noncovered Expatriates
You will not face the green card exit tax if you are classified as a noncovered expatriate. To be considered covered, two conditions must be met:
- You are an expatriate, and
- You fail one of three IRS tests:
- Net worth test: Your net worth is greater than $2 million at the time you renounce your status.
- Tax liability test: Your average annual net income tax for the five years before expatriation exceeds a certain threshold (in 2017, that threshold was $162,000, adjusted annually).
- Tax compliance test: You cannot certify that you complied with U.S. tax obligations during the five years leading up to expatriation.
There are limited exceptions. For example, if you acquired U.S. citizenship in addition to another citizenship at birth, or if you renounced your status before age 18 ½, the exit tax may not apply.
If you fail one of these tests, the IRS may either demand payment of the full exit tax or impose ongoing taxation on certain income streams.
Strategies to Avoid the Green Card Exit Tax
If you are a green card holder planning to relinquish lawful permanent resident status, consider these strategies to reduce your risk of being taxed:
- Limit your residency period: Remaining a green card holder for fewer than eight years may prevent you from being classified as a long-term resident, thereby avoiding expatriate status.
- Ensure tax compliance: Address any tax issues from the previous five years to avoid the compliance test.
- Manage income levels: If possible, structure your finances to reduce average annual income below the IRS threshold.
- Consider asset gifting: Strategic transfers between spouses may allow each individual to remain under the $2 million net worth limit, as the IRS calculates worth individually. However, gifting assets can be complex and requires careful legal planning.
Gifting Assets Between Spouses
When calculating net worth, the IRS considers individuals separately, even if they are married. This allows couples to hold a combined $4 million in assets without triggering the $2 million per-person threshold. Many couples achieve this balance through asset transfers.
While gifting can be a powerful tool, it is also complicated and may create unintended tax consequences. For this reason, professional guidance is strongly recommended before attempting this strategy.
How Green Card Link Can Help
If you are considering renouncing U.S. citizenship or green card status, and you believe you may be classified as a covered expatriate, seeking professional guidance is essential. At Green Card Link, its immigration attorneys are experienced in navigating complex exit tax issues. They can help you:
- Evaluate your expatriate classification,
- Plan strategic asset allocation, and
- Take steps to minimize or avoid exit tax liability.
The green card exit tax is complicated, but with careful planning and the right legal guidance, you can protect your wealth and exit the U.S. system with confidence.
Contact the immigration attorneys at Green Card Link today to schedule a consultation and receive personalized advice tailored to your situation.