Tax Law Center Blog

A US passport or green-card is losing its glamour and appeal. Some people are surrendering their prized green cards because of the US Foreign Account Tax Compliance Act (FATCA), which requires most foreign governments and the US to freely exchange financial account information, leaving no asset concealed.

The US, with broad information reporting and high tax rates, has one of the most complex and sophisticated tax systems in the world.  The failure to timely disclose and pay tax on undisclosed cash and property could lead to high penalties.  Under FATCA, US connected persons will have to declare all their assets held worldwide to the US government.

Many people are closing bank accounts to hide financial trails and “gifting” assets spouses, children, or relatives. Those doing so may further complicate their situation since the US has an elaborate gift tax regime, which taxes most gifts.

To minimize US tax, green-card holders residing outside of the US should explore the tie breaker provisions of US income tax treaty to minimize tax to India (but not US information reporting). Unfortunately, this option is unavailable to US citizens abroad (green-card holders only).

Although frequently overlooked or misunderstood, all income tax treaties have a set of rules called “tie-breaker” rules. If a person can be considered a resident of the United States (under its normal tax laws) and also a resident of another country (under its normal tax laws), then in order to prevent double taxation to that person, you look at the tie-breaker rules to exclude income in the non-resident country. This opportunity is different than the normal foreign tax credit calculations (which presumes the income is taxable in both countries).

A misunderstood possibility is transferring the assets to a non-US person or a trust in order to avoid reporting in the US. This possibility requires a careful analysis of the US gift tax that may apply to such a transfer and the complex area of US tax law applicable to foreign trusts.
Another misunderstood possibility is renunciation of US citizenship. To deter tax avoidance by abandonment of citizenship, the US tax law imposes an expatriation tax on some of those who give up U.S. citizenship. The tax also applies to green-card holders who abandon U.S. residency after having held a green card for at least 8 of the last 15 tax years.

While a US passport or green-card has lost its glamour and appeal, it is now more of a burden than a benefit. With no simple strategies, professional advice is required to explore and navigate strategies to remain compliant.