Today we cover part one of a two-part series on Tax Responsibilities of Lawful Permanent Residents. This is a very important subject for potential EB5 visa immigrants. The following information has been provided by Maurice M. Glazer a specialist in international tax and accounting; we welcome him to our team. Please give us your opinion of this information and do not hesitate to contact Maurice for advice. You can read more about Mr. Glazer at our “EB5 Visa Team” page.

Tax Responsibilities of Lawful Permanent Residents

If it’s January it must be tax season…. Many U.S. citizens and lawful permanent residents of the U.S. (green card holders) move to another country and forget or choose not to file a tax return in the U.S. But be warned: The U.S. requires you to file a tax return accounting for your worldwide taxable income—and the statute of limitations never runs out.

In many cases, you may have few or no U.S. taxes to pay, thanks to exclusions and deductions that you may qualify for as an expatriate. But you definitely are required to file if you are a U.S. citizen or resident alien. Not filing can create major issues. For instance, if you live abroad for 10 years and then return to the United States, the penalties and interest you’ve accrued may be more than the actual tax.

The U.S. Internal Revenue Service (IRS) is working with the State Department and with the Immigration and Naturalization Service (INS) to improve compliance with the tax return requirement.

One bit of good news: A U.S. citizen or resident alien doesn’t need to file a tax return unless gross income for the year is over a certain amount. The amount varies depending on your tax status. (See box for details.)

Even when you’re required to file a return, you may be able to cut or eliminate your U.S. taxes, thanks to the foreign earned income exclusion, the housing exclusion and deduction, and the tax credit you get for any foreign taxes you’ve paid. For 2011, you can exclude from taxes up to $92,900 of income you’ve earned abroad. The housing exclusion and deduction are living expenses above $40.72 per day for 2011.

Legal ways to zero out taxes

Fortunately, there are also deductions from gross income that you can take. See Section 911 of the tax code for these. You can also deduct foreign housing costs that you paid, or that were paid on your behalf, which are above the base amount.  You need to file these items on form 2555 or form 2555 EZ.  According to the IRS, it’s important to file these forms even if you’ve earned less than the amount you’re allowed to exclude.

U.S. citizens and long-term permanent residents can also take a credit for taxes paid to a foreign government.  This credit is explained in section 901 of the income tax code. You report the tax credit on form 1116.

Almost half of those filing non-resident tax returns show no tax liability because of these two codes, Sections 901 and 911.

Additional forms to complete

If you’re self-employed and no foreign social security is being withheld from your earnings, you must file a Schedule C with your U.S. tax return and pay U.S. self-employment tax on your net earnings (that is, after deducting your expenses).  The self-employment tax is 15.3%. It is not reduced by the foreign earned income exclusion or by foreign tax credits.

If you own more than a 10% ownership in a foreign corporation, you are required to file a special form reporting that interest.  If the corporation is making a profit, it will be a “controlled foreign corporation,” and you could owe U.S. tax on its earnings.

If you are a beneficiary or a trustee of a foreign trust (for instance, a fideicomiso), or you have a bank account with a balance over $10,000, you must also file a special form.

You can be fined up to $10,000 or more for not filing any of these forms—and since there is no statute of limitations, the fines can be levied many years from now when the IRS and Hacienda (Mexico’s tax department) finally start sharing information. You can also be liable for individual state income taxes.

Tomorrow we will cover: Changing citizenship to avoid taxes: Not advisable