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Paying US taxes as a green card holder

Wednesday, January 23, 2019

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GREEN card holders who live and work outside the US are enquiring as to whether they should file taxes. The short answer is 'yes'. All green card holders who reside and work outside the US are required to pay taxes as tax residents, and may also qualify for certain foreign-earned income exclusions and/or foreign income tax credits.

Green card holders (also known as 'resident aliens') are required to file Form 1040 for tax purposes, while those of non-resident status are required to file Form 1040NR.

NON RESIDENT ALIENS

If this is your first year holding a green card, you may still be classified as a 'nonresident alien' and may not be liable to pay tax or file returns. However, you must meet the substantial presence test as outlined below, proving that:

a. You have been in the US for fewer than 183 days during the current calendar year;

b. You have maintained a tax home in a foreign country during the year;

c. You have a closer connection to that country than to the US.

RESIDENT ALIENS

As a 'resident alien' your tax treatment would be quite different. The US requires all its citizens and residents to file tax returns, regardless of actual residency. The same tax requirements that apply to US citizens and residents living in the US, apply to those who live outside the US.

Therefore, all US tax filers are required to report their worldwide income, regardless of that income's origin, which would include any income earned in Jamaica. It is important to note that income is reportable whether or not it has been taxed in Jamaica.

Aside from the tax dollars themselves, tax filing obligations can be onerous and may entail the filing of a Foreign Bank Account Report. Green card holders living outside the US must consider the following:

1. Professional tax advice can be costly.

2. Tax return preparation can be significant when international tax issues are involved.

3. Failure to file will result in penalties and interest for late filing, under-reporting of income, and underpayment of taxes.

Fortunately, Jamaica has a bilateral double taxation treaty with the US. Under this treaty, workers in both countries are relieved from double taxation on income earned in either country.

The net effect of the treaty is that taxpayers pay taxes at whichever rate is the highest of the two countries, but do not pay taxes on the same income in both countries.

Tax rates in the US—unlike in Jamaica where the rate is a flat percentage—depend on the individual level of income, so whether US citizens or green card holders living in Jamaica pay at the US rate or the Jamaican rate will depend on worldwide income levels.

REPORTING ON PROPERTY

The general rule is that foreign real estate is not a foreign financial asset that is required to be reported using Form 8938. Therefore, personal residences or rental properties outside of the US do not need to be reported on this form.

However, if the real estate is held by a foreign entity, such as a corporation, partnership or trust, then an individual's interest in the entity becomes a specified foreign financial asset that may be reportable on Form 8938.

The value of the real estate held by the entity is used to determine the value of the shares to be reported on Form 8938, but the real estate itself is not separately reported on the form. Therefore, if you purchase foreign real estate in your name, without an entity, you do not need to include that asset on Form 8938. However, all rental income must be reported on your personal return (Form 1040 and Schedule E), regardless of the amount and regardless of whether you are required to file Form 8938.

REPORTING FINANCIAL ACOUNTS, STOCKS AND SECURITIES

If you qualify to file Form 8938, you must report any financial accounts maintained by a foreign financial institution eg (Jamaica, St Lucia, BVI etc). Examples of financial accounts include savings, deposits, checking and brokerage accounts held with a bank or broker–dealer.

Further, you are required to report stocks or securities issued by a foreign corporation (such as one that holds foreign real estate), a trust or another entity (such as an offshore company) as well as to report any financial instrument or contract held for investment with an issuer or counterparty that is not a US person. Examples of such assets include:

• Stocks or securities issued by foreign corporations;

• Stocks or membership interests issued by foreign limited liability companies.

• Notes, bonds or debentures issued by foreign persons;

• Interest rate swaps, currency swaps, basis swaps, interest rate caps, interest rate floors, commodity swaps, equity swaps, equity index swaps, credit default swaps or similar agreements with foreign counterparties;

• Options or other derivative instruments with respect to any of these examples, or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer;

• Interests in foreign partnerships;

• Interests in foreign retirement plans or deferred compensation plans;

• Interests in foreign trusts or estates;

• Any interests in foreign-issued insurance contracts or annuities with a cash-surrender value;

ABANDONED GREEN CARD HOLDERS

If you have an expired green card that you have ignored because you no longer reside in the US, or have a valid green card but have no interest in residing in the US, you are still liable to pay US tax. Tax law is very precise on this topic and under the US tax rules, once resident status has been acquired, it is deemed to continue unless rescinded administratively or unless judicially determined to have been abandoned.

RECOMMENDATIONS

Non-payment of taxes is a criminal offence which can lead to revocation of your green card. Therefore, if you are a green card holder, living and working outside the US with no intention of returning there to live, or have not been consistent in filing your taxes annually or at all, you are advised to contact a tax professional to assist you.

Venice Williams-Gordon is an attorney-at-law at Lewis, Smith, Williams & Co.


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