Expats may have to give up their hard-won green cards to stay ahead of the US tax man under controversial FATCA tax avoidance rules.
FATCA – the Foreign Accounts Tax Compliance Act – requires US taxpayers to tell the Internal Revenue Service (IRS) every detail about their overseas investments and earnings as part of their annual tax return.
Many expats fail to realise that holding a green card captures them in the FATCA net and they must give up information about any overseas holdings – and pay tax on them in the USA.
Many expats in the US have unwittingly fallen in to this tax trap as they already held bank accounts, savings and investments in the country where they previously lived and did not realise FATCA would crack down on their finances so severely.
The problem is damned if you do and damned if you don’t.
Giving up US residency
If someone gives up their long term US tax residency, an exit tax is due to the IRS.
Ripping up a green card and heading for the exit door is the same as giving up tax residency in many cases in the eyes of the IRS – and tax may be due depending on the personal net worth of the expat leaving the US.
Tax residency for expats is complicated and anyone in doubt should double check with a US tax attorney.
Green card rules have time limits attached, and these limits can alter if application for residency is delayed by just 24 hours and pushed in to another tax year.
The good news is recent expats settling in the States may not come under the FATCA rules as another law clearly states that anyone taking up US tax residency after June 17, 2008, is considered to have disposed of any property owned outside of the USA at a fair market value prior to leaving.
However any gain is liable to capital gains tax rules.
FATCA reporting is due to start from January 01, 2014, while more than 50 nations negotiate FATCA treaties with the US.
However, the problem for expats is all sorts of tax laws collide at that point relating to their overseas holdings and any income generated.
Taxpayers already have to file a Foreign Bank Account Report (FBAR) along with their tax returns.
The exceptions are complicated and the penalties for failing to comply are notoriously harsh, so any expat should consult an appropriately qualified tax accountant or attorney to avoid the risk of conflict with the IRS.