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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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I am a US permanent resident planning to leave US and giving

Resolved Question:

I am a US permanent resident planning to leave US and giving up the green card. I have several questions, mostly related to US and California tax.

Information:
- Thailand citizen.
- Green card holder for 6 years. (H1 before that)
- Work with a company in California.
- Married. Wife is in Thailand. Our tax return has been married filing jointly, treating her as resident for tax purpose. Her income is reported but we use Foreign Earned Income Exclusion.
- Plan to move to Thailand around middle of the year and give up permanent residency.
- Assets in US: cash in bank accounts, stocks, mutual funds, 401k, company's stock (RSU, ESPP) and option.

Questions: (for both Federal and California tax)
(1) I would like to confirm the process, just before leaving.
- Submit sailing permit (1040C).
- Inform USCIS about surrendering green card. (Do I need to inform IRS separately?)
- Send form W-8BEN to my brokers/banks/mutual funds/401k to inform the change of status to foreign.
Is this correct? Do I miss anything?
Ideally, I would like all of these to happen near the same time, because I need to have green card until my last day of employment, but I want to have foreign status before starting my new job in Thailand if possible. Can this be done?

(2) Is there any difference in terms of tax if I exercise vested stock options before or after leaving US? What about selling company's stocks or any other stocks? (My company policy is that I need to exercise stock option within 30 days of employment end, but can keep company stocks.)

(3) At the beginning of next year, I will need to file tax return. Is it correct that I can only file as married filing separately? I should include only income before leaving US, right?

(4) After that, do I need to file tax return (tax year 2014 and later)? Assume that I only buy/sell stocks, mutual funds, earn interest/dividend, but do not touch 401k. What if I take out 401k? Is it possible that 401k is taken out in very small portion each year so that I do not need to file tax?

(5) I have contributed to social security for 10 years. Will I be eligible even after becoming foreign status?

(6) Do you have any other suggestion or anything I need to be mindful about?

Thank you very much.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
Do I need to inform IRS separately?
Filing application for a tax clearance document - is the way to inform the IRS about changing of your status from a resident alien to a nonresident alien. To obtain a permit, file Form 1040-C or Form 2063 (whichever applies) with your local IRS office before you leave the United States.
See some details here - http://www.irs.gov/taxtopics/tc858.html

LEV :

Send form W-8BEN to my brokers/banks/mutual funds/401k to inform the change of status to foreign. Is this correct?
That is correct, but you may send this form AFTER you become a nonresident alien. There is no need to send that form before that.
(2) Is there any difference in terms of tax if I exercise vested stock options before or after leaving US?
The difference depends if IRC 877A expatriation rules apply to you or not. These rules apply if any of the following statements 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 ($145,000 for 2009 and 2010, $147,000 for 2011, and $151,000 for 2012).
•Your net worth is $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.

LEV :

What about selling company's stocks or any other stocks?
If expatriation rules apply to you - IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. IRC 887A further provides that any gain arising from the deemed sale is taken into account for the taxable year of the deemed sale notwithstanding any other provisions of the Code.

LEV :

(3) At the beginning of next year, I will need to file tax return. Is it correct that I can only file as married filing separately?
That is correct - generally, a husband and wife cannot file a joint return if either one is a nonresident alien at any time during the tax year.


Former U.S. long-term residents are required to file Form 8854, Initial and Annual Expatriation Statement, with their dual-status return for the last year of U.S. residency.
(4) After that, do I need to file tax return (tax year 2014 and later)?
As a dual-status taxpayer not filing a joint return, you are taxed on income from all sources for the part of the year you were a resident alien. Generally, you are taxed on income only from U.S. sources for the part of the year you were a nonresident alien.
What if I take out 401k?
That will be your taxable income.
Is it possible that 401k is taken out in very small portion each year so that I do not need to file tax?
That is possible if the administrator withholds all nonresident tax liability at sources.

LEV :

(5) I have contributed to social security for 10 years. Will I be eligible even after becoming foreign status?
As a nonresident alien - you will not be eligible for social security benefits. But in in future you will become a resident alien - you will be eligible.
(6) Do you have any other suggestion or anything I need to be mindful about?
Income received by nonresident aliens from US sources that is not effectively connected with their business or trade is subject of 30% withholding.

Customer:

Thank you for your answers. Please clarify the following.


(1) If form W-8BEN is sent after I become nonresident alien, it is possible that there is some transaction (stock sale or dividend) between becoming nonresident and brokers receiving the form. I presume that the brokers will not deduct tax on this transaction and will report it to IRS. How will I prove to IRS that it should not be taxed as resident alien for this transaction?


(2) I believe that expatriation rules apply to only US citizen and long-term permanent resident, is that correct? I have been holding green card for only 6 years.


Please be specific about what is the difference, not just whether there is any difference. Say I have 100 company's stock options with strike price $5, and exercise at $10. If I exercise before status change, I would need to report $500 as income. What happens if I exercise after status change? Do I need to report anything? If so, what and how do I need to report? Keep in mind that this is company stock option I earned over the years of working with company. Not just any option I bought.


(4) I think you misunderstood this question. For tax year 2014 and later, I will not be dual-status. Please be clear (yes or no) whether I need to file tax return if I only have stock and mutual fund transactions for year 2014.

Customer:

Moreover, please confirm that your answers apply to California tax as well.

LEV :

(1) If form W-8BEN is sent after I become nonresident alien, it is possible that there is some transaction (stock sale or dividend) between becoming nonresident and brokers receiving the form. I presume that the brokers will not deduct tax on this transaction and will report it to IRS.
The broker is sent reporting to the IRS for the tax year. You need to be sure that form W8BEN is sent before Dec 31 and be sure you inform the broker the date on which your residency status is changed.
How will I prove to IRS that it should not be taxed as resident alien for this transaction?
You inform teh IRS by filing your tax return and by filing an application for a tax clearance document.
(2) I believe that expatriation rules apply to only US citizen and long-term permanent resident, is that correct? I have been holding green card for only 6 years.
These rules apply if any of the following statements apply to your situation - please verify.
•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 ($145,000 for 2009 and 2010, $147,000 for 2011, and $151,000 for 2012).
•Your net worth is $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.

LEV :

Please be specific about what is the difference, not just whether there is any difference. Say I have 100 company's stock options with strike price $5, and exercise at $10. If I exercise before status change, I would need to report $500 as income. What happens if I exercise after status change?
Income is recognized when received. If expatriation rules does NOT apply to you - there is no difference. If these rules does apply - all assets are deemed as sold at the time of expatriation.
Do I need to report anything? If so, what and how do I need to report? Keep in mind that this is company stock option I earned over the years of working with company. Not just any option I bought.
That fact only affects how the basis is determined - but doesn't affect how the gain is calculated.

LEV :

(4) I think you misunderstood this question. For tax year 2014 and later, I will not be dual-status. Please be clear (yes or no) whether I need to file tax return if I only have stock and mutual fund transactions for year 2014.
If you will be a nonresident alien for the whole year - you will be taxed ONLY on income from US sources. Your broker with withhold income taxes as for nonresident alien - and will issue you a reporting form. In most situations - you do not need to file a tax return.

LEV :

Moreover, please confirm that your answers apply to California tax as well.
California state taxes applied to residents of this state and to nonresidents who have income from sources within California.
That is based on California laws - not federal laws. Thus rules above doesn't apply to California.

Customer:

For (2), the first statement applies to me. But I still question whether expat rules 877 apply to me.


Quoting from IRS website
http://www.irs.gov/Individuals/International-Taxpayers/Expatriation-Tax
"The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to US citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes."


And in IRC 877(e), long-term permanent resident is defined as "any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in subparagraph (A) or (B) of paragraph (1) occurs."


I have been permanent resident for only 6 years.

Customer:

When I ask about your answers for California tax, I mean the same questions above, such as whether I need to report stock option transaction after becoming foreign status (or out of California status), and whether I need to file 2014 tax return, etc.


By the way, do you know how California know whether I am out of state, and the income for later part of the year should not be reported? Do I need to file any form to California to inform this?


 

Customer:

Thank you for your answer on form W-8BEN. If I send to form to broker on Dec31 and indicate the date when residency status change, will the broker backtrace and withold tax for the transactions after status change? Or I need to manually report to IRS?

LEV :

For (2), the first statement applies to me. But I still question whether expat rules 877 apply to me.
If any of listed statements apply to you - you are subject of the expatriation tax provisions.
The fact that you are not a long-term permanent resident doesn't relief you from that provision - see the section - http://www.law.cornell.edu/uscode/text/26/877
(e) Comparable treatment of lawful permanent residents who cease to be taxed as residents
(1) In general
Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701 (b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.
So - you are NOT treated as a citizen of the United States for purposes of this provisions.

LEV :

When I ask about your answers for California tax, I mean the same questions above, such as whether I need to report stock option transaction after becoming foreign status (or out of California status), and whether I need to file 2014 tax return, etc.
Generally - capital gain on stock realized by nonresident of California is not classified as an income from California sources. However under some circumstances it might be treated as taxable income - for instance if the company owns real properties in California.

LEV :

By the way, do you know how California know whether I am out of state, and the income for later part of the year should not be reported? Do I need to file any form to California to inform this?
In the year you move out of California - you file a tax return as a part year resident. That is the only you need to do. Be sure you change your address - so your employer will not report report your wages as earned in California.

LEV :

If I send to form to broker on Dec31 and indicate the date when residency status change, will the broker back trace and withhold tax for the transactions after status change? Or I need to manually report to IRS?
If taxes are withheld incorrectly by the broker - you will need to file your nonresident tax return and either will pay additional taxes or will claim a refund.

Customer:

Thank you very much for your answers. I will try to digest them, and will let you know if I have more question.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23251
Experience: Taxes, Immigration, Labor Relations
Lev and 5 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

For (2), I read the reference you provide but still do not fully understand. From the reference, "Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States ..." This sentence begins with long-term resident, but I think I am not a long-term resident in the first place.


 


And I don't understand your statement "So - you are NOT treated as a citizen of the United States for purposes of this provisions." But you also mentioned that expat rules apply to me?


 


 

Expert:  Lev replied 1 year ago.
Here is the extract extract from the code section - http://www.law.cornell.edu/uscode/text/26/877

(e) Comparable treatment of lawful permanent residents who cease to be taxed as residents
(1) In general
Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701 (b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.

So - because you are not a long-term resident for purposes of this section - you are NOT treated as a citizen of the United States for purposes of this provisions.

See section - 877A - Tax responsibilities of expatriation - http://www.law.cornell.edu/uscode/text/26/877A
which is related to co-called "covered expatriate"

(g)(1)(A) In general
The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877 (a)(2).

and as we already saw - you meet subparagraph (B) requirements:
(B) the net worth of the individual as of such date is $2,000,000 or more,
However section 877A(g)(B) provides some exceptions - and seems none may be used in your situation.
So far based on information provided it seems to me that you are a “covered expatriate” and rules mentioned in this section does apply to you.
Sorry if you expected differently.

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