Lawful Permanent Residency: A Status Not Without Its Burdens

Three questions about Lawful Permanent Residency, a highly sought after immigration status.

For many, a greencard providing U.S. permanent residency is a dream come true, oftentimes taking applicants years of patiently navigating arcane immigration laws and interminable queues caused by the limited number of immigrant visas available.

This said, however, being a permanent resident is not without its burdens and restrictions.

There are three questions to ask:

1.    Are Permanent Residents Subject to Worldwide Taxation under the U.S. Internal Revenue Code?

U.S. lawful permanent residents (LPRs) are subject to the U.S. rules imposing taxation on worldwide income, but this is not the only way in which a foreign national can become subject to U.S. tax laws.

According to IRS Regulations, foreign nationals can become U.S. Tax Residents if they have been present in the U.S. over 182 days in the course of three consecutive years prior to the tax year at issue. The formulas governing how to count presence are beyond the scope of this article.

The point, however, is that one does not necessarily have to be an LPR to become a U.S. tax resident subject to worldwide taxation under U.S. tax law. 

In the past, I have heard some H-1B status holders express their reluctance to file for permanent residency because they would then become U.S. Tax Residents, but in the vast majority of cases such persons may already be considered tax residents of the U.S. because they have accumulated the critical amount of U.S. presence.

2. What is the Exit Tax and How Does It Affect Longtime LPRs?

For persons who have acquired LPR status and who have been in that status for 8 of 15 years prior to losing or abandoning this status, not only is there exposure to U.S. taxation on worldwide income, but the renunciation or inadvertent abandonment of LPR status may result in the imposition of a potentially onerous Exit Tax on worldwide assets with the tax bill coming due more or less immediately. 

My guess is that  foreign nationals concerned about the tax burden imposed on permanent residents confuse the rules governing tax residency with the Exit Tax, which for foreign nationals holding substantial foreign assets could amount to potentially millions of dollars in tax liabilities. To avert such potential liability takes serious advanced tax planning involving a tax professional with experience in what vehicles may be used to reduce the exposure of worldwide assets to U.S. tax rules. 

Next- 3. Can LPR Status Be Abandoned? and the Takeaway