Must Green Card Holders Pay U.S. Taxes on Foreign Income?

Once you are approved for a green card (U.S. lawful permanent residence), you automatically become what is called a U.S. "tax resident." That comes with reporting and possibly payment obligations. As discussed below in this article, U.S. tax residents must declare their entire incomes to the U.S. government’s Internal Revenue Service (IRS) at tax-time. That's true no matter where the income was earned. They must also report certain information about their foreign financial assets. And of course, they might need to pay taxes to the U.S. federal government and possibly to their state government as well.

Reporting a Green Card Holder's Worldwide Income

As a lawful permanent resident, you will, at tax-time, need to declare income both from your job within the United States and any money that you receive from investments or business activities carried on outside U.S. borders.

Or if you live in another country, you will need to declare to the U.S. taxing authorities any income that you earn from a job there. (Note that if you do live in another country but want to keep your U.S. green card, you will need to take steps to make sure the U.S. immigration authorities won’t consider you to have abandoned, or given up your residency. One possible way to handle this is to file for a reentry permit before you depart.)

You might have heard a commonly circulated myth saying that the number of days you spend in the United States each year has some effect on whether or not you are a U.S. tax resident. This is true only for people who have nonimmigrant (temporary) visas. It is not true for green card holders. If you have U.S. lawful permanent residence, your worldwide income must be reported to the U.S. government, even if you remain outside the United States for an entire year.

You will need to file U.S. tax return Form 1040 each year by April 15th. This form, as well as instructions, can be found on the IRS website at www.irs.gov.

If the state you live in charges income tax, you might need to file there, as well. However, U.S. tax laws vary state to state, so this will require some research. Your obligations will likely depend on factors concerning your state residency and the sources of your income.

Will You Owe Tax in the U.S.?

Filing a tax return with the IRS does not necessarily mean that the U.S. government will tax all of your worldwide income. International treaties often regulate whether or not you must pay U.S. taxes on income earned in other countries. There’s a good chance that you will get a tax credit against your U.S. taxes for any income tax you pay in another country. Nevertheless, green card holders have to at least report all income they have earned worldwide.

Reporting a Green Card Holder's Non-U.S. Assets

Under the Foreign Account Tax Compliance Act (“FATCA”), U.S. income tax residents must file IRS Form 8938 along with their IRS Form 1040 if they hold foreign financial assets with a value in excess of $50,000.

The threshold amount is higher if you are filing a joint tax return or you live outside the United States. The idea behind this law is to combat a pattern of tax evasion by people sheltering their assets and investments in offshore accounts.

Note that this is a different obligation than required by the U.S. Treasury Department regarding foreign bank accounts, which you must report on by June 30th, as described on the Report of Foreign Bank and Financial Accounts (FBAR) page of the IRS website.

Consequences of Failing to Comply With U.S. Tax Laws

Failure to follow U.S. tax laws may be considered a crime. If you are found guilty of a tax crime, you can be fined or, in a worst-case scenario, imprisoned. Also, your green card can be revoked and you may be removed from the United States (ordinarily after a hearing in immigration court). Under FATCA, failing to report your foreign assets over $50,000 can result in a penalty of up to $10,000, or up to $50,000 for continued failure to report after being notified by the IRS.

The IRS can also impose a penalty on any understatement of tax that is attributable to non-disclosed assets. This is usually 20% of the undisclosed amount, but can go up to 40% in extreme cases.

Another possible consequence of failing to file U.S. tax returns, or of claiming nonresident tax treatment under a tax treaty between your home country and the United States, is that you could be found to intend to be considered a nonresident of the United States, which is equivalent to expressing an intention to abandon your permanent resident status. Your green card can be revoked on this basis.

Even if you aren’t either prosecuted for a crime or found to have abandoned your U.S. residence, failure to file taxes can block you from becoming a naturalized U.S. citizen. USCIS's application for citizenship, Form N-400, asks about whether you have filed your U.S. taxes. Some applicants who have failed to do so end up having to pay back taxes and penalties to the U.S. federal and state governments in order to proceed with their application for U.S. citizenship.

Getting Professional Help

To find out exactly how to follow U.S. tax laws, consult an accountant, a tax attorney, or the U.S. Internal Revenue Service (www.irs.gov). And if you have failed to file taxes in the past and are planning to apply for U.S. citizenship, or you have encountered trouble with the immigration authorities, hire an experienced U.S. immigration lawyer, as well.