What is the Difference between US Citizens and Green Card Holders When it Comes to Taxes?
When it comes to filing federal taxes, there is pretty much no difference in tax compliance. Even though you may be classified differently for immigration law purposes, Green Card Holders are considered US tax residents – just like US citizens. So the rule of US citizens being taxed on their global income applies to Green Card Holders. But you shouldn’t worry about unequal tax differences because you may be able to take advantage of tax breaks such as the Foreign Earned Income Exclusion and the Foreign Tax Credits.
The tricky aspect of being a Green Card Holder is when it comes to tax treaty positions. Green Card Holders can use tax treaty positions to lower their overall tax burden, however, only a lawyer would be able to fully analyze a tax treaty position for you.
Does a Green Card Holder Need to Pay Tax to the US and Their Home Country?
Maybe. As previously stated, a Green Card Holder must report income earned from anywhere in the world to the IRS. However, there are many countries that have a tax treaty with the U.S. that will allow the Green Card Holder to offset their taxable income. This generally means that you still have to file two tax returns (US return and foreign home country return). For example, if Jacob is living and working in Toronto, Canada but is a Green Card Holder, he must file both a U.S. Form 1040 and Canadian Form T1. Assuming he can pass the Physical Presence Test, he may be eligible for the Foreign Earned Income Exclusion and may be able to shield all of his income from U.S. taxes. Even though he will only have to pay taxes to Canada and none to the U.S., he must still file returns with both countries.
What about FBAR (FinCEN 114) for a Green Card Holder?
Since Green Card Holders are considered U.S. tax residents (even though they may be classified differently for immigration purposes) they are required to file the FBAR if applicable, as well as FATCA reporting.