Claiming U.S. Non-Resident Status When Holding a U.S. Green Card

​Rödl & Partner Tax Matters Vol 2015 – 12, published in August 2015

Many individual taxpayers have applied for and received status as a U.S. Permanent Resident, commonly referred to as a "Green Card Holder". As such, these individual taxpayers are required under U.S. domestic law to file a U.S. income tax return (Form 1040) each year reporting worldwide income and including any necessary informational returns. To the extent income tax was paid in non-U.S. jurisdictions that have an income tax treaty with the U.S., the taxpayer is entitled to a credit against U.S. tax on that same income, subject to certain limitations.

The U.S./Germany income tax treaty overrides U.S. domestic law in the case where a person is deemed to be a resident of both the U.S. and Germany in the same tax year. In this case, the tiebreaker rules are used to determine residency for tax purposes. First, residency is determined based on where a permanent home is available to the taxpayer. If a permanent home is available in both places, residency is determined based on the person's center of vital interests. If the person's personal and economic relations are closer in Germany (determined on a facts and circumstances basis; i.e. no bright line test), then the Green Card Holder may take the position under the treaty that their center of vital interests is in Germany. In order to take the treaty position, the Green Card Holder must file Form 8833 with Form 1040NR, the U.S. non-resident income tax return, reporting only U.S. source (and not worldwide) income. There is a $1,000 penalty for failure to disclose the treaty position on Form 8833. In addition, in theory the statute of limitations never begins to run and there is a risk that the IRS could assert that the Green Card Holder is a resident and require the return to be filed on such basis, if the treaty position is not claimed.

The U.S. non-resident treaty position does not extend to certain informational return filings for the Green Card Holder including (but not limited to) Forms 5471, 8865, 8858, 8838, 8621, and FinCEN 114 (i.e. "FBAR"). In other words, the Green Card Holder would still be required to file these informational returns even if claiming U.S. non-resident status under the treaty and filing Form 1040NR. The penalties for not filing the majority of these forms start at $10,000 per form.

It is possible that the U.S. immigration and border patrol may learn about the Green Card Holder's treaty position claiming German residence as the center of vital interests. Although this is a legal matter, it may have tax implications. The Green Card Holder may be deemed to have given up their Green Card upon filing a non-resident return (Form 1040NR) and therefore potentially subjecting the Green Card Holder to the U.S. exit tax.

If the Green Card Holder is not automatically deemed to have given up their Green Card when they file a Form 1040NR, the Green Card could also be deemed relinquished by U.S. border patrol if the Green Card Holder travels to the U.S. and the border patrol revokes the Green Card based on the treaty position taken by the holder on the Form 1040NR. In this case the U.S. exit tax may be imposed on the Green Card Holder as of the date the Green Card is revoked.

Under the exit tax regime, all of a taxpayer’s assets are deemed to be sold on the day before giving up the Green Card and the taxpayer is taxed on the gain in excess of an inflation adjusted amount of $821,000 for 2023. The exit tax will also apply if the Green Card Holder surrenders the Green Card or renounces U.S. permanent residence status. The exit tax only applies to long-term residents. This means that the taxpayer was a Green Card Holder for 8 of the last 15 years. Additionally, the Green Card Holder needs to have a net worth of $2 million or the average annual net income tax liability for the 5 years ending before the expatriation date is more than $190,000.

Claiming non-resident status under the treaty for U.S. tax purposes when holding a Green Card is not as simple as it seems. Certain filing requirements cannot be avoided despite the non-resident claim and in some cases serious tax implications may result. We recommend that your tax advisor be consulted prior to any claims of non-residency. 

If you have any questions, please contact your Rödl & Partner representative.

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