Don’t let your green card become a tax and compliance nightmare

Getting a green card is a dream come true for many. But without suitable tax planning before entering the US, you might find yourself in an unfavourable US tax position without even realising it.  Let’s explain why…

In most cases, you would be a US tax resident (for US federal income tax purposes) once you have been issued with your green card and have entered the US with your green card. This technically means that you must pay tax in the US on your worldwide income and gains, however this does not automatically mean you are no longer a SA tax resident. If you have not formally ceased to be an SA tax resident by no longer being regarded as ‘ordinarily resident’ in SA or no longer meeting the physical presence test, you will also be liable for tax on a worldwide basis in SA.

It may be tempting to claim treaty relief in terms of the double taxation agreement concluded between SA and the US, but formal advice must be obtained from US immigration specialists, since claiming treaty relief may have an impact on your US immigration status.

Trust considerations:

If you are a beneficiary of a trust, domestically or offshore, as a green card holder it would be pivotal to obtain US tax advice to ensure that the trustees have taken your facts and circumstances into account. Distributions from trusts that are not set up with US planning specifically in mind are usually taxed aggressively from a US perspective and may be coupled with penalties and interest. This could result in up to 100% of a distribution made to a US person being wiped out by tax, penalties and interest!

In the same breath, whether a distribution is made or not, being a beneficiary of a trust with certain investments or with underlying companies can also result in tax obligations and reporting requirements, so it is also pivotal to have your affairs assessed by suitably qualified US tax advisers.

Investments held personally:

As an SA tax resident who is a green card holder, your investment lens must consider both jurisdictions from a tax perspective.

For example, certain foreign (non-US) mutual funds, ETFs, unit trusts or collective investment schemes could be regarded as Passive Foreign Investment Corporations, also known as “PFIC” investments. PFICs are taxed quite punitively from a US perspective, potentially at the highest income brackets, and again, may be subject to penalties and interest. The high tax rates are accompanied by onerous reporting requirements as well.

With certain investment policies such as endowment policies and wrappers, there is a potential for the policy to be taxable in SA (by the relevant insurance house) and again in the US in the green card holders’ hands. This could result in double taxation as there is a mismatch in taxpayers.

When it comes to SA retirement funds, lump sum payments from SA retirement products are generally taxable at the withdrawal benefit table rate or the retirement lump sum benefit table rate. These tables generally provide a preferential tax rate in comparison to your marginal income tax rates.  The US may in certain circumstances treat the payment as ordinary income subject to income tax rates in the US.

Ensuring that you file your US tax returns timeously and correctly is but one of the items to tick off to ensure compliance in the US. If you hold a green card or are about to obtain a green card, beware of the adverse US tax and compliance consequences that follow. It is always recommended to obtain specific US tax, compliance and immigration advice, where applicable.

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