When it comes to tax obligations, the difference in tax obligations between U.S. citizens and Green Card holders is often misunderstood. Both groups are classified as “U.S. persons” for tax purposes, meaning they are subject to the same tax laws, including the requirement to report worldwide income to the IRS regardless of where they live or work. This global taxation system applies equally to U.S. citizens and Green Card holders, making them responsible for filing annual tax returns using Form 1040 and reporting foreign income, assets, and accounts if applicable. However, there are nuanced differences in areas like estate taxes, expatriation rules, and the potential impact of international tax treaties that can affect how each group fulfills their obligations.
For Green Card holders, their tax residency begins on the day they become lawful permanent residents of the United States. Unlike U.S. citizens who are taxed for life unless they renounce citizenship, Green Card holders can end their U.S. tax obligations by formally relinquishing their Green Card through USCIS Form I-407. Additionally, while both groups can utilize tools like the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE) to prevent double taxation on foreign income, Green Card holders may have more opportunities to leverage international tax treaties depending on their home country.
Key Similarities in Tax Obligations
- Worldwide Income Reporting: Both U.S. citizens and Green Card holders must report all income earned globally to the IRS, regardless of where they reside.
- Annual Tax Filing: Both groups file Form 1040 annually by April 15 (or June 15 if living abroad with an automatic extension).
- Foreign Asset Disclosure: If foreign financial accounts exceed $10,000 at any point during the year, both must file a Foreign Bank Account Report (FBAR) and possibly Form 8938.
- Deductions and Credits: Both groups are eligible for standard deductions, itemized deductions, and credits such as the Child Tax Credit or Earned Income Tax Credit.
Key Differences in Tax Obligations
- Expatriation Rules:
- U.S. citizens who renounce their citizenship may face an exit tax if they meet specific criteria.
- Green Card holders who formally relinquish their status may also face an exit tax but only if they meet certain thresholds (e.g., long-term residency or significant net worth).
- Estate and Gift Taxes:
- U.S. citizens are subject to estate taxes on worldwide assets.
- Green Card holders are generally only subject to estate taxes on U.S.-based assets unless a treaty states otherwise.
- Tax Treaty Benefits:
- While both groups can benefit from international tax treaties to reduce double taxation, Green Card holders may have more flexibility depending on their home country’s treaty with the U.S.
- Some treaties include “residency tiebreaker rules” that allow Green Card holders to claim non-residency for U.S. tax purposes under specific conditions.
- Duration of Obligation:
- U.S. citizens remain liable for U.S. taxes for life unless they renounce citizenship.
- Green Card holders can terminate their tax obligations by relinquishing their Green Card through proper legal channels.
Compliance Challenges for Both Groups
Both U.S. citizens and Green Card holders face significant penalties for noncompliance with IRS regulations. Failure to report worldwide income or disclose foreign accounts can lead to severe fines or even criminal charges. For Green Card holders specifically, noncompliance could jeopardize their immigration status or future eligibility for naturalization.
To avoid being taxed twice on the same income by both the U.S. and a foreign country:
- Foreign Tax Credit (FTC): Allows taxpayers to offset taxes paid abroad against their U.S. tax liability.
- Foreign Earned Income Exclusion (FEIE): Permits exclusion of up to $120,000 (as of 2025) of foreign-earned income from taxable income if eligibility criteria are met.
- Tax Treaties: Many countries have agreements with the U.S., offering relief from double taxation through reduced rates or exemptions.
FAQs
Do Green Card holders pay taxes on worldwide income like U.S. citizens?
Yes, both Green Card holders and U.S. citizens must report all worldwide income annually to the IRS.
Can a Green Card holder stop paying U.S. taxes?
Yes, by formally relinquishing their Green Card through USCIS Form I-407, they can terminate their U.S. tax obligations.
Are there differences in estate taxes between U.S. citizens and Green Card holders?
Yes, while U.S. citizens are taxed on worldwide assets, Green Card holders are typically taxed only on assets located within the United States unless a treaty states otherwise.