Tag Archives: Green Card

Diversity Immigrant Visa (Green Card) Holders and U.S. Taxes, by Jean Mammen, EA

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Winners of the U.S. diversity immigrant visa lottery may welcome more information about the U.S. tax system. They may not have considered tax implications when deciding if or when to accept the visa and enter the U.S. Usually they have not previously spent long periods in the U.S. on a visa, and they may not have family or friends familiar with the U.S. tax system.

Taxable Income

A green card holder becomes responsible for reporting and paying U.S. taxes on total worldwide income, by U.S. tax rules, from the date they enter the U.S. on the immigrant visa and become a ‘Lawful Permanent Resident’ (LPR) (green card holder). This continues until the LPR (later perhaps citizen) formally ends that status as well as all tax responsibilities through  ‘expatriation’ procedures.

Resident vs non-resident

Let’s compare:

Taxpayer DIV was just issued an immigrant visa (IV) through the Diversity lottery program. Once admitted to the U.S., they will become a Lawful Permanent Resident, a green card holder.

Taxpayer H was just issued an H1b visa because they were sponsored for a job in the US. This is a non-immigrant visa (NIV) allowing a temporary stay.

The visas of both taxpayers were issued November 5th, 2019.

This will be the first ever visit to the U.S. for both individuals.

First situation:

Both taxpayers enter the U.S. on November 7, 2019.

Taxpayer DIV will have two different U.S. residency statuses in 2019 – non-resident alien from January 1, 2019, through November 6, 2019, and resident alien by green card, and thus a tax resident, from November 7 through December 31. Form 1040 is their tax return and Form 1040NR is attached as a statement. Total worldwide income is included on Form 1040. The Form 1040NR may show zero income if there was no U.S. source income before they entered the U.S.

Taxpayer H will begin counting days of presence in the U.S. towards meeting the Substantial Presence Test (SPT) on November 7. They will not meet the SPT in 2019 but are likely to meet it in mid-2020.

For 2019, Taxpayer H will be a non-resident alien filing on Form 1040NR and include only U.S. source income.

Second situation:

Both taxpayers delay entry into the U.S. until February 7, 2020.

Neither taxpayer will need a 2019 U.S. income tax return.

Taxpayer DIV is considered a Lawful Permanent Resident (and thus a tax resident) beginning January 1, 2020. They did not enter the U.S. until the year following the year the immigration visa was issued. Their status changed on January 1 of the following year, no matter when they entered the U.S. in the following year. Form 1040 will be the tax return. It will include total worldwide income received during the full year of 2020.

Taxpayer H begins counting days of presence in the U.S. on February 7. They will meet the SPT when the total number of days in the U.S. reaches 183. Once the SPT is met, U.S. tax residency begins on their first countable day in the U.S. in 2020, February 7. Taxpayer H will have dual tax residency for 2020 and use both Form 1040 and Form 1040NR to cover the entire year. Form 1040 will be the tax return. It will include total worldwide income from February 7 through December 31, 2020. Form 1040NR will be attached as a statement, and include only U.S. source income received from Jan 1, 2020, through February 6, 2020.

Simple or complicated tax return

If this is not the taxpayers’ first visit to the U.S., determining the date (tax) residency began will require more information and more steps.

How complicated their U.S. tax return will be will vary according to their life situation. A lottery candidate may be a young high school or college graduate, just beginning their work life, a business owner, a self-employed person, or a mid-career professional. They might be single or have a family. They might have assets in the country where they have been living. Their home country tax situation might be simple or complicated. It interacts with their U.S. tax situation.

Seek out a tax professional with experience preparing dual status returns for visa holders and immigrants. Consult the professional as soon as possible after you arrive.

  If you are an employee, you want correct tax withholding and a correct W-4 in place as soon as possible.

  If you have a business in the U.S. or in another country, you want to report this correctly on your U.S. tax return.

If you have filed an incorrect income tax return, you may not be able to renew your LPR status when it expires.

U.S. tax system is different

Perhaps in your home country there is no personal income tax.

Or, the correct tax may be deducted from most income sources before you get the money. What you get is all yours!

The U.S. describes its system as voluntary compliance by its taxpayers. They are expected to be careful to report all income, and accurately record and document any allowable expenses, deductions, or tax credits on the income tax return.

Income is sometimes described as money you have now that you did not have before. If you are the kind of person who sees coins on the ground, picks them up, and keeps them, those coins are income to you. If they add up to more than $1, their sum ought to be added to your income! That sounds silly, and probably few people who sometimes pick up a coin think about whether they have picked up enough to need reporting, but…that shows the U.S. approach to voluntary reporting!

State and Local (Income) Tax

Most states and many local jurisdictions, such as a county, a city, or a town, also require income tax filing.

Your residency status on your federal return (tax resident or a tax non-resident) may be different from on your state or local tax return. See a tax professional.

Tax Year

The U.S. uses the calendar year, January 1 to December 31, for its annual individual income tax return. Other countries use different tax reporting years. If you have income from countries that use different tax years, you will need to use monthly or quarterly statements and records to put together the financial information for use on the income tax returns.

Your tax professional will help you understand tax law and what applies to your situation.

To do list:

Consult a tax professional early.

Check out the areas of expertise of the tax professionals you are considering.

W-4: Submit an accurate W-4 to your employer. If you are married but your spouse will not have a Social Security number during the tax year, your filing status likely is Married Filing Separately. If you think even more money should be withheld to cover taxes on other income, your W-4 should reflect this. If you have children who will not be with you in the U.S. nor have a Social Security number, they will not help you on your tax return.

Keep detailed records as advised by the tax professional.

Swiss Banks Don’t Guarantee Secrecy Today

The International Data Exchange System provides regular, generally automated, exchange of financial information between the U.S. Treasury and many other governments and financial institutions. If an institution or national tax jurisdiction holds some financial information about you, likely it has been shared with other authorities.

Other Tax Forms:

Form 1116: If you pay taxes in another country on income that you must also report on your U.S. tax return, you may be able to take a Foreign Tax Credit on your U.S. income tax using Form 1116.

(Form 2555: You cannot use Form 2555 – the Foreign Earned Income Exclusion – to subtract from U.S. taxable income any money that you earned in another country before you became a U.S. (tax) resident.)

Form 8938: If you have certain specified foreign assets, which may include investment funds or retirement plans, you report them on this form. Also, if they produced income, you may need to report that income on the income section of Form 1040. Form 8938 is part of the income tax return.

Form 3520 – If you receive gifts totaling more than $100,000 from non-U.S. people you report them on Form 3520. It is not part of the income tax return. It is mailed separately to a different address.

Form 3520 is also used to report foreign inheritances, ownership of a foreign trust, or receipt of distributions from a foreign trust.

Foreign Bank and Financial Account Report (FBAR or Form FinCEN 114). If you have foreign accounts whose total value exceeded $10,000 at any time during the year, you report them on the electronic U.S. Treasury Form FinCEN 114. You submit it electronically through the bsaefiling website. Your tax professional can help you submit the form. This is a required form. Penalties begin at $ 10,000 if you knowingly do not submit it.

Leaving the U.S.

Temporary Departure:

Follow the conditions USCIS placed on you about how long you must stay in the U.S. to maintain your resident alien status, how long you can travel outside the U.S. , and when you may apply for a waiver of the conditions.

It can be a good idea to carry a copy of your most recent tax return with you. It might help you convince Customs and Border Protection that you are up-to-date on your responsibilities.

Ending U.S. Residency:

When your green card reaches its expiration date, you can no longer use it to enter the U.S. You must apply to renew it if you do want to remain a green card holder. Your income tax responsibility does not change.

If you decide you no longer wish to be a lawful permanent resident (LPR – green card holder) of the U.S., you must complete all the steps of the formal process called “expatriation”. Until you have done so, you continue to pay U.S. taxes on total worldwide income.

The main expatriation form is Form 8854

You will need the help of an experienced immigration lawyer to correctly complete all the required expatriation steps and end your U.S. tax responsibility.

Lottery Applicants:

DO NOT assume you will complete the application process or be awarded a diversity visa by the September 30 deadline if you are notified that you have been selected to apply for an immigrant visa.

DO NOT assume that you will be admitted to the U.S. when you arrive with your immigrant visa in your passport. The Customs and Border Protection Officer at the Port of Entry could refuse entry to you because of information they learned during the interview or that was added to your file after the U.S. consulate issued the visa.

Good Luck!

 

 

Green Cards and Wages from an Embassy or International Organization: U.S. Tax Court Explains It All , by Jean Mammen, EA

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Sole Abrahamsen, a green card holder, and her husband, Clifford Abrahamsen were the Petitioners in 142 T.C. No. 22, decided on June 9, 2014.

This green card holder and her husband had not declared her wages from work at the Finnish Mission to the United Nations on several years of tax returns. When queried, they claimed the wages were exempt from U.S. income tax under one or another exception.

Green cards holders (resident aliens) are taxed the same as U.S. citizens: gross income “from whatever source derived”, IRC 61(a), minus exemptions, adjustments, deductions, credits or other items allowed in the tax code to determine taxable income and tax liability, as provided in IRC 62, 63, 67, and 68, code sections on credits, and treaties that provide for exemptions. The tax code recognizes treaties as equivalent authority by IRC 894 and IRC 7852(d).

The plaintiffs cited several reasons why the wife’s wages were not taxable:

  • The U.S. tax code:  IRC 893(a) or 7701(b)(5)(B). Taxpayers often must show that the other country could and would offer equivalent tax treatment to a U.S. citizen or resident.
  • Three treaties:
    • The U.S.- Finland Tax Treaty
    • The Vienna Convention on Diplomatic Relations
    • The Vienna Conventions on Consular Relations
  • And the International Organizations and Immunities Act

The June 9, 2014, U.S. Tax Court ruling analyzed the petitioners’ arguments and dismissed each one as not applicable.

The court summarized its ruling:

Held: I.R.C. sec. 893 does not apply to wages P-W (plaintiff’s wife) received from the Mission during 2004-09 because she had previously executed a valid waiver of rights, privileges, exemptions, and immunities.

Held, further, neither the U.S.-Finland tax treaty, the Vienna Convention on Diplomatic Relations, the Vienna Convention on Consular Relations, nor the International Organizations Immunities Act provides an income tax exemption to permanent U.S. residents working in nondiplomatic positions for international organizations.

Click below for the full text of the Tax Court ruling: https://www.ustaxcourt.gov/InOpHistoric/AbrahamsenDiv.Lauber.TC.WPD.pdf

The court explained its ruling on the various claims as follows:

IRC Section 893: It sets the criteria for excluding foreign government and international organization compensation from U.S. taxation. Taxpayers often must show that the other treaty signatory country could and would offer equivalent tax treatment to a U.S. citizen or resident.

The IRS produced a copy of the original I-508 waiver signed by the plaintiff.  By signing the waiver, an individual working in the U.S. under visa A, G or E (treaty trader or investor) states that they wish to become a lawful permanent resident alien and so are giving up any rights, privileges and exemptions associated with that work status.

The court ruling stated:

“petitioners cite no statute or judicial precedent to support their assertion that we can ignore a validly executed waiver. We accordingly conclude that the waiver was effective as of January 29, 1992. All income that Ms. Abrahamsen received from the Mission after that date is ineligible for the section 893 exemption and is subject to Federal income tax unless some other exemption applies. See Ying v. Commissioner, 99 T.C. 273, 293 (1992)”

U.S. – Finland Treaty

The savings clause in the treaty made the wages paid by the Finnish mission to the plaintiff’s wife taxable by the country where the petitioner was resident, despite the provisions of any other treaty article, such as the one on government work.

The Tax Court opinion stated:

“Specifically, petitioners contend that tax exemption is afforded by article 19 of the Treaty, which concerns remuneration received for “Government Service.” “Article 1, paragraph 3 of the Treaty contains a “saving clause” that over-rides certain of its other provisions. This saving clause provides that “[n]otwithstanding any provision of the [Treaty] except paragraph 4, a Contracting State may tax a person who is treated as a resident under its taxation laws.” Treaty, Tax Treaties (CCH) para. 2945.01, at 73,011. Article 1, paragraph 4 states that benefits conferred under article 19, dealing with government service, are unaffected by the saving clause, but only in the case of “individuals who are neither citizens of, nor lawful permanent residents in, that State.” Ibid.

 “During the years at issue Ms. Abrahamsen was a “lawful permanent resident in” the United States, and the exclusion set forth in article 1, paragraph 4, does not apply. The saving clause is thus operative, and it authorizes the United States to tax any person “who is treated as a resident under its taxation laws.” As a permanent resident, Ms. Abrahamsen was a “resident” for U.S. tax purposes. See sec. 7701(b)(1)(A)(i). Thus, regardless whether her compensation from the Mission was derived from “Government Service” within the meaning of article 19, her wages were subject to Federal income tax under the saving clause. 3

3 The Treaty was amended in 2006. See 2006 Protocol to the 1989 U.S.-Fin. Income Tax Treaty, May 31, 2006, Tax Treaties (CCH) para. 2946. This amendment, which applies to petitioners’ Federal income tax liabilities for 2008-09, see id. art. IX, does not affect the analysis. Under the 2006 amendment, the United States may tax Ms. Abrahamsen as a “resident.” See id. arts. I and II. Because she was a U.S. permanent resident during 2008-09, she is covered by the saving clause. See id. art. I(4) and (5).

Diplomatic Status

The Vienna Conventions provide many protections for diplomats and consuls. The Court found that Ms. Abrahamsen was neither one.

“Petitioners argue that Ms. Abrahamsen’s wages were exempt from taxation pursuant to other provisions of international law. Central to these arguments is the assertion that Ms. Abrahamsen held diplomatic status for the years at issue. Petitioners provide no support for this assertion. Rather, they simply describe her duties and conclude that her “position with the Mission is clearly diplomatic in nature.”

“The evidence respondent provided shows this assertion to be incorrect, at least for U.S. tax purposes. During the relevant period Ms. Abrahamsen was employed by the Mission as either an adviser or an attaché. The United Nations did not notify the United States that she held a diplomatic title with regard to either position, and her name did not appear on the List of Officers Entitled to Diplomatic Privileges and Immunities maintained by the U.S. Mission to the United Nations. Concluding as we do that Ms. Abrahamsen did not have diplomatic status or rank, we address petitioners’ arguments briefly.

Petitioners posit that article 34 of the Vienna Convention on Diplomatic Relations (VCDR) exempts Ms. Abrahamsen’s wages from taxation. Convention on Diplomatic Relations and Optional Protocol on Disputes, U.S.-Vienna, Apr. 18, 1961, 23 U.S.T. 3227. However, article 34 applies only to a “diplomatic agent.” Article 1 of the VCDR defines a “diplomatic agent” as a “head of the mission or a member of the diplomatic staff of the mission.” “Diplomatic staff” is defined to mean “the members of the staff of the mission having diplomatic rank.” Because Ms. Abrahamsen did not have diplomatic rank, she was not a “diplomatic agent” under the VCDR, and article 34 therefore did not exempt her wages from taxation. 4

4 There is no merit to petitioners’ suggestion that article 49 of the Vienna Convention on Consular Relations (VCCR) exempts Ms. Abrahamsen’s wages from U.S. tax. The VCCR does not apply to the Mission. See City of New York v. Permanent Mission of India to United Nations, 533 F. Supp. 2d 457, 460 (S.D.N.Y. 2008) (holding that “[t]he tax status of the consular portions of the premises is controlled by Article 32 of the Vienna Convention on Consular Relations” and that “[t]he tax status of the U.N. Mission portions of the premises is controlled by the Vienna Convention on Diplomatic Relations”), rev’d on other grounds, 618 F.3d 172 (2d Cir. 2010).

International Organization and Immunities Act This U.S. law provides for the rights, privileges and immunities, including exemptions from certain taxes, enjoyed by international organizations and their staff members who are not residents, and/or, in a few case, not citizens, of the country where they are located. These are similar to the rights, privileges, and immunities accorded to foreign government officials.

The court ruling states:

“Petitioners next argue that Ms. Abrahamsen’s wages are exempt from tax pursuant to the International Organizations Immunities Act (IOIA). See 22 U.S.C. sec. 288d (2006). Even if the IOIA applied to Ms. Abrahamsen, which respondent disputes, the law does not confer the benefits petitioners claim. Under the IOIA, employees of foreign governments and international organizations are “immune from suit and legal process relating to acts performed by them in their official capacity and falling within their functions as such representatives, officers, or employees.” 22 U.S.C. sec. 288d(b). This case arises from Ms. Abrahamsen’s earning income within the United States as a permanent resident of the United States. She is not being subjected to liability for any act performed in her official capacity, and the earning of income is not part of her official function as a representative of Finland to the United Nations. Therefore, the IOIA does not exempt her wages from Federal income tax. See United States v. Coplon, 84 F. Supp. 472, 474 (S.D.N.Y. 1949) (IOIA “does not confer general diplomatic status immunity” but confers immunity on U.N. officers and employees only “for the category of acts performed by them in their official capacity and falling within their functions as such officers or employees”); sec. 1.893-1(b)(3), Income Tax Regs. (quoting the relevant provisions of the IOIA, including that “[n]o person shall, by reason of the provisions of this title, be considered as receiving diplomatic status * * * other than such as are specifically set forth herein”).

Note: Revenue Ruling 2007-60 is not cited by the court and would not apply. It states that a treaty-based tax exemption continues to exist after an IRC section 247(b) waiver is signed that makes someone subject to the tax code and unable to claim income exclusion under the tax code.

The court held that the U.S.- Finland Treaty did not exempt the wages paid to the plaintiff’s wife from U.S. taxation.

The treaty founding the United Nations does not include an exemption from U.S. taxation on U.N. wages for green card holders (non-citizen U.S. residents), unlike the founding treaties of the IMF, IBRD, and IADB.

The I-508 Waiver: Revenue Ruling 2007-60 states:

Alien individuals employed by a foreign government or international organization in the United States, who file the waiver provided by section 247(b) of the Immigration and Nationality Act (USCIS Form I-508) will be entitled to any tax exemption conferred under the provisions of an applicable income tax treaty, consular agreement, or international agreement that is still in force, to the extent the application of the exemption is not dependent upon the Internal revenue laws of the United States.

References cited

https://www.ustaxcourt.gov/InOpHistoric/AbrahamsenDiv.Lauber.TC.WPD.pdf

IRC 61          Gross income

IRC 62          Adjusted Gross Income

IRC 63          Taxable Income

Standard deduction, personal exemptions,   itemized  deductions

IRC 67          Miscellaneous Itemized deductions, and other Schedule A deductions

IRC 68          Overall Limitation on Itemized Deductions

Credits           Look up specific credit in the tax code

IRC 7701(b)(1)(A)(i) Resident of the U.S.

IRC 893(a) or 7701(b)(5)(8) Non-taxability of foreign government wages

IRC 894, 7852(d)    Tax Treaty provisions equivalent to tax code

Rev. Rul. 2007-60    Provisions of a treaty are not affected by I-508 waiver

The Vienna Conventions on Diplomatic and Consular Relations

The International Organization Immunities Act  Public Law 291, 12/29/1945

22 U.S.C, section 288(d)

E.O. 9698     Lists the public international organizations entitled to enjoy certain                               privileges, exemptions and immunities

List is available as:

State Department 9 FAM 41.24 Exhibit I, and

National Archives list found by searching on “E.O. 9698”