What An Australian Expat Needs to Consider With A Green Card – We often receive a large amount of enquiries from Australian expats residing in the US and they range from new arrivals to long term residents (10+ years in the US).
One area that we always cover is what type of visa the Australian expat is on. Is it a L1, E3, J1 or are they a Green Card holder or perhaps a US Citizen?
The answer to this question is always very interesting because it opens up the next conversation about are you aware the Australian expat tax obligations like the exit tax (HEART Act) when you become a covered expatriate.
Ongoing US Tax Obligations for Australian Expats
The amount of Australian expats that are not aware of their ongoing US tax requirements is astounding and with the current digital age more and more are become readily aware of the issues that can present themselves.
Visa status in the US is very important because there is a very large difference between a person who has been residing in the US for 7 years on a L1/E3 (rolling visas) visa compared to someone who is a Australian expat on a green card.
What Is a US Long-Term Resident & How Does This Affect Australian Expats
This relates to what is considered a ‘long-term resident’ in the eyes of the IRS. Technically, a Australian expat green card holder is a non-US Citizen that is treated as a US tax resident and is also a lawful permanent resident. The main proof is that the individual is issued with an Alien registration card (aka green card).
The formal version:
An individual is a lawful permanent resident of the United States at any time if—
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
Australia’s equivalent would be a permanent resident visa but we don’t tax on a worldwide basis regardless of residency status or citizenship and is purely based on tax residency.
Let’s hope that doesn’t change although the amended main residence exemption bill is quite punitive with its retrospective nature but I digress.
What Are The Implications For An Australian Expat Who Holds a Green Card & Intends to Return To Australia?
The main issue around obtaining a green card as an Australian expat, and being a long term tax resident in the US, is when you finally make the decision to leave the United States and return to Australia.
When a Australian expat hands back their green card may affect their tax position. Timing is everything in this case!
Currently a long term tax resident is a US Citizen or green card holder that has held permanent residency status for at least 8 out of the past 15 years.
The timing issue that arises is when did those 8 years actually begin and this correlates to the exact date when the green card is provided to the Australian expat.
Most Australian expats believe that when they get a green card they have quite a bit of time to exit without triggering the covered expatriate provisions but in reality, they don’t.
Let’s do a short recap on what a covered expatriate is and the exit tax provisions:
How Does An Australian Expat Green Card Holder Qualify As A Lawful Permanent Resident?
An Australian expat will satisfy some of the exit tax provisions if they meet the lawful permanent resident (LPR) status and have been an LPR ‘in’ 8 out of the past 15 years.
This is why most people usually get caught out because when calculating the time frame its not whether a full calendar year has been served.
Let’s look at a quick example. Oscar has been on a rolling L1 visa’s for the period 15th January 2010 to 15th December 2012. In the 2012 calendar year he obtains his green card, and in March 2019 Oscar returns back to Australia and gives up his green card status. Now let’s look at which calendar years ‘in’ which a green card was held:
There are 8 years in total but in reality the individual has only held the card for 6 full calendar years but the legislation refers to ‘in’.
Oscar’s previous time on an L1 visa does not count towards his long term tax residency period. In this example, Oscar has satisfied Internal Revenue Code 877(e) and therefore the rules under IRC 877A might apply:
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation (US$151,000 for 2012, US$155,000 for 2013, US$157,000 for 2014, and US$160,000 for 2015).
- Your net worth is US$2 million or more on the date of your expatriation or termination of residency.
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate.”
What Is A Covered Expatriate?
If you are treated as a covered expatriate this is when the exit tax legislation kicks in, which means you could be forced to pay a very large exit tax bill to the IRS.
Australian expats who maintain their status on a visa such as the L1s, E3s or J1s are quite lucky as they do not have to go through this very painful process.
An exit from the US for these types of visa holders is quite easy and painless. At present there are only two ways to avoid being a long-term resident; one is making an income tax treaty election or for an Australian expat to give up their green card before hitting the 8th year.
Australian expat green cardholders need to seriously consider how their finances are structured, because if they are caught by this exit tax, which realistically might apply to someone who has a house back in Sydney, superannuation accounts, share portfolio, IRA and maybe a beneficiary to a family trust. They might not be lucky enough to have the liquidity to pay the tax bill due.
It’s important that you seek advice from a professional that has experience with US expats like an accountant or qualified financial planner to assess whether an exit tax event might be likely.