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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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Hi, I am a green card holder who will be in the US until

Resolved Question:

Hi,

I am a green card holder who will be in the US until February next year, after which I will be surrendering my green card and moving permanently to Hong Kong for a new job. From what I understand, even though I will pass the substantial presence test (31 days in 2014 + 183 days according to the formula), my residency ends once I surrender my green card. I won't be a covered expat. As a result, I will need to file dual-status income tax returns. Few questions:
- Is this accurate? Taxes are lower in Hong Kong and I want to make sure that I don't get taxes US taxes on that income.
- Are there any steps I need to take to ensure that there is clear evidence that I have moved permanently?
- What shall I do with my Roth IRA and 401k?
- As I will not be a covered expat, I believe I won't need to fill 8854. Is there something else I need to fill to indicate to the IRS of my situation?

Thanks!
Tyson
Submitted: 10 months ago.
Category: Tax
Expert:  jgordosea replied 10 months ago.

Greetings,

 

Although you will pass the substantial presence test and could be resident for the part of the year prior to moving out of the country, for the remainder of the year you will have a closer connection to the foreign country and so do not have to pay US income tax on the income for that period after you move.

See http://www.irs.gov/Individuals/International-Taxpayers/Substantial-Presence-Test

"Closer Connection Exception to the Substantial Presence Test

Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;

  1. The closer connection exception available to all aliens. Please refer to Conditions for a Closer Connection to a Foreign Country.
  2. The closer connection exception available only to students. Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students and Sample Letter."

It is accurate that you will file returns for a dual status alien for that year when your residence ends.

 

You can do as any other IRA account holder and either maintain the account or withdraw. If you withdraw there are penalties as well as including the income as subject to tax in the year withdrawn.

If you leave the funds to grow in the account when you do take out money as a nonresident will your IRA trustee would have to subtract "Non-resident Withholding" tax of 30% (unless there is a tax treaty between where you are resident when you withdraw and the United States that would enable you to claim a lower rate).

In most cases it will be better to let the IRA account grow tax deferred and withdraw later. There is no tax consequence until you withdraw from those accounts, regardless of where you reside.

 

For green card holders, your status will not change unless and until you get an official notice from the U.S. Citizenship and Immigration Service (USCIS) that there has been a final administrative or judicial determination that your green card has been revoked or abandoned.

 

When you surrender your green card during the taxable year, your tax status as a resident alien will terminate on the last day of that calendar year. However, if you can establish that, for the remainder of the calendar year, your home is in a foreign country or you maintain a closer connection to that foreign country than to the United States, your residency termination date will be the date you surrender your green card.

 

You may want to consider starting the surrender in 2013 instead of in 2014.

You are correct that you are not required to file Form 8854 as a long term resident.

 

See http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Nonresident-Aliens

"Before leaving the United States, all aliens (with certain exceptions) must obtain a certificate of compliance. This document, also popularly known as the sailing permit or departure permit, must be secured from the IRS before leaving the U.S. You will receive a sailing or departure permit after filing a Form 1040-C (PDF) or Form 2063 (PDF)."

 

Please ask if you need more discussion or clarification.

Thank you.

Customer: replied 10 months ago.

Thanks for the prompt response. Couple of clarification questions:

 

1. You mention that I should consider surrendering my green card in 2013. Unfortunately I can't do that as I will be working on it (and receiving income) until the end of January 2014. I am curious why you thought it would be a good idea to surrender in 2013. As my move is permanent, that should enable me to easily prove closer connection, right? This is the part I want to make sure I get right - if I can prove closer connection from March - December, my income during that time will be free from US taxes. Are there any steps I should take to ensure sufficient proof of closer connection?

2. For 401k, I understand your argument. However, I was thinking that I can withdraw some of it (eg 20-30k) as that will tax me at lower rates in 2014 when I have little US income (only one month's worth), right?

3. For Roth IRA, how would it work if I withdraw. Do I just pay a 10% penalty as its been open for 5 years? I assume the 10% is only on the earnings - is that right?

 

Thank you!

Expert:  jgordosea replied 10 months ago.

Hello again,

 

You are quite welcome.

 

1. I suggested to consider surrendering in 2013 so that your tax status as a resident alien will terminate on the last day of that calendar year (just something to be considered - more so in case the move was not permanent)

Ending residency status in 2013 leaves nothing to prove in regard to a closer connection in 2014 if that was not going to be obvious for the latter part of the year.

Indeed, if there is no presence in the US or connection to the US, then the closer connection is obvious.

Details of the closer connection are at http://www.irs.gov/Individuals/International-Taxpayers/Conditions-for-a-Closer-Connection-to-a-Foreign-Country

"In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following:

Note: It does not matter whether your permanent home is a house, an apartment, or a furnished room. It also does not matter whether you rent or own it. It is important, however, that your home be available at all times, continuously, and not solely for short stays."

2. Regardless of how little other income you have in the year, even at 15% income tax and 10% penalty that 25% immediate reduction is likely not worth having the funds now instead of later. In very few cases is that loss of funds ever recovered to restore your savings for retirement to what it would be when left in the retirement account. Nonetheless, you can choose to take less now or more later.

 

3.You are correct that the 10% is only on the earnings from the Roth IRA; but those earnings will also be income subject to US income tax. So these funds also will be immediately reduced by (something approaching) 25% for most taxpayers.

 

Hope this does clarify for you; but please continue to ask if you need more help.

 

Thank you for the opportunity to be of service.

Customer: replied 10 months ago.

Great - last clarification. On the link http://www.irs.gov/Individuals/International-Taxpayers/Conditions-for-a-Closer-Connection-to-a-Foreign-Country you sent, it says:


"For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire current year, and must be located in the same foreign country for which you are claiming to have a closer connection."


 


This confused me - why does it say for the entire year? My move will only be in March so I'll only have the tax home fron March - December. Does that violate this part?


 


Thanks!

Expert:  jgordosea replied 10 months ago.

Sorry for the confusion as that page is primarily for claiming nonresident status for the entire year (even when present) but was used to demonstrate for you the items that are considered, as requested.

 

As discussed, your status will change on the surrender date when you get an official notice from the U.S. Citizenship and Immigration Service (USCIS) that there has been a final administrative or judicial determination that your green card has been revoked or abandoned.

 

The closer connection is mainly just to establish your change after surrender but in your case the surrender date will serve as the end of your residency.

 

With that change in status you will file dual status.

More information is at http://www.irs.gov/Individuals/International-Taxpayers/Taxation-of-Dual-Status-Aliens

 

Hope that clarifies even though we are mixing two areas together on the IRS site.

 

Thank you.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3032
Experience: I've prepared all types of taxes since 1987.
jgordosea and 5 other Tax Specialists are ready to help you
Customer: replied 10 months ago.

Excellent - thanks!

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