Green Card Holder Taxes: You Owe on Worldwide Income

The green card test

Why green card holders are always resident aliens

There are two ways to become a U.S. resident alien for tax purposes: the substantial presence test (based on days of physical presence) and the green card test. Under the green card test, you are a resident alien for every year in which you hold a valid green card at any point during the year — regardless of how many days you actually spend in the U.S.

This means a green card holder who lives abroad for most of the year is still a U.S. resident alien for tax purposes, still must file Form 1040, and still must report worldwide income. The only way to stop being a resident alien under the green card test is to formally abandon or relinquish the green card.

How the foreign tax credit prevents double taxation

The most important tool for green card holders with foreign income is the foreign tax credit (Form 1116). If you earn income in another country and pay income tax to that country's government, you can credit those foreign taxes against your U.S. tax liability on the same income.

Alternatively, you can deduct foreign taxes paid (as an itemized deduction) instead of taking the credit. The credit is almost always more beneficial than the deduction because it reduces your tax dollar-for-dollar, whereas a deduction only reduces your taxable income.

FBAR: reporting foreign bank accounts

If the combined maximum value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year, you must file an FBAR (FinCEN Form 114). This is a separate filing from your tax return — it goes to FinCEN (Financial Crimes Enforcement Network), not the IRS, and is filed electronically through the BSA E-Filing System.

• What counts: Bank accounts, securities accounts, brokerage accounts, mutual funds, and certain insurance policies with cash value held at foreign financial institutions.
• Deadline: April 15, with an automatic extension to October 15 (no form needed to get the extension).
• Penalties: Non-willful failure to file can result in a penalty of up to $10,000 per account per year. Willful violations can carry penalties up to the greater of $100,000 or 50% of the account balance.

FATCA: reporting foreign assets (Form 8938)

In addition to the FBAR, green card holders who live in the U.S. and have foreign financial assets exceeding $50,000 on the last day of the year or $75,000 at any point (higher thresholds for married filing jointly and for those living abroad) must file Form 8938 with their tax return. FATCA covers a broader range of assets than the FBAR, including foreign stocks held directly (not through a U.S. brokerage), foreign partnership interests, and foreign pension accounts.

What happens if you give up your green card?

Abandoning your green card does not end your tax obligations immediately. If you held the green card for 8 or more of the 15 tax years ending with the year of abandonment, you are a "covered expatriate" under IRC Section 877A. As a covered expatriate, you are treated as if you sold all your worldwide assets at fair market value on the day before you relinquished the green card. Any gain above the exclusion amount is taxable. You must file Form 8854 in the year of relinquishment.

Even if you held the green card for fewer than 8 years, you must still file Form 8854 to certify five years of tax compliance. Planning the timing of green card relinquishment is a significant tax decision — consult a qualified tax professional before proceeding.

Green card holders living abroad

If you maintain your green card but live and work in another country, you may qualify for the Foreign Earned Income Exclusion (FEIE), which can exclude a portion of your foreign earned income from U.S. tax. To qualify, you must meet either the Physical Presence Test (330 full days abroad in a 12-month period) or the Bona Fide Residence Test, and you must have a tax home in the foreign country.

Be aware that maintaining a green card while living abroad indefinitely can create immigration problems separate from tax issues. USCIS may consider your green card abandoned if you are outside the U.S. for more than one year without a re-entry permit.

Common mistakes green card holders make

1. Not reporting foreign income. The IRS receives information about foreign accounts through FATCA reporting by foreign banks. Unreported foreign income is increasingly detectable.
2. Missing the FBAR deadline. The FBAR is a separate filing from your tax return. Filing your 1040 on time does not cover the FBAR, which has its own deadline and system.
3. Confusing FBAR and FATCA. These are two different requirements with different thresholds, different forms, and different filing systems. You may need to file both.
4. Not filing while living abroad. If you hold a green card and live overseas, you still must file a U.S. return every year reporting worldwide income. Absence from the U.S. does not eliminate the filing requirement.
5. Giving up the green card without planning for the expatriation tax. If you held the card for 8+ years, the deemed sale of worldwide assets can create a large one-time tax bill. Plan the timing carefully.

For help estimating your U.S. tax burden, try our effective tax rate calculator or salary after taxes calculator.