Episode 75
The Green Card Exit Guide: How to Avoid Surprise Taxes When Moving Away From America
Failing to formally surrender a green card can have serious consequences, including triggering expatriation rules, a potential exit tax, and even long-term inheritance tax implications for US heirs. While most people know that renouncing US citizenship can lead to an exit tax, far fewer green card holders realize that many of the same rules can apply to them. Simply leaving the United States does not end your US tax residency, but too many assume that moving abroad automatically closes the chapter.
Richard Taylor – dual UK/US citizen and Chartered Financial Planner – is joined by Debra Rudd, Certified Public Accountant at Hodgen Law PC, to unpack the lesser-known tax landmines facing green card holders who relocate overseas. They emphasize that approaching Form I-407 and your departure from the US as a planned, coordinated strategy rather than a last-minute border formality can make all the difference between a smooth transition and a sudden exit tax bill with lasting consequences.
In this episode of Expat Wealth, Richard and Debra discuss:
Why holding a green card for as little as six years can classify you as a “long-term resident” and potentially a covered expatriate.
The three tests that determine whether an expatriating individual (including long-term green card holders) becomes a covered expatriate.
How failing to properly surrender your green card, or signing Form I-407 without planning, can unexpectedly trigger exit tax and future inheritance tax exposure for your US-based children.
How large language models (LLMs) can help expats and prospective expats decode complex tax language, empowering them to ask better, more informed questions of their advisers.
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Expat Wealth is supported by Plan First Wealth. Plan First Wealth is a Registered Investment Advisor serving fellow expatriates and immigrants living across the US on matters such as retirement planning, investment management, tax planning and non-US asset management.
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Expat Wealth is affiliated with Plan First Wealth LLC, an SEC registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.
ABOUT RICHARD:
Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.
As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).
Connect with Richard on LinkedIn
TRANSCRIPT:
Richard Taylor:
[00:00:00 – 00:00:05]
You’re on a green card. You’re gonna exit the U.S. why are we raising the alarm bells?
Debra Rudd:
[00:00:05 – 00:00:05]
It was complicated.
Richard Taylor:
[00:00:05 – 00:00:06]
Stressful.
Debra Rudd:
[00:00:06 – 00:00:07]
Yes.
Richard Taylor:
[00:00:07 – 00:00:09]
It must have been so stressful.
Debra Rudd:
[00:00:09 – 00:00:15]
I can’t imagine the level of stress. I don’t think I personally have ever experienced anything that stressful.
Richard Taylor:
[00:00:15 – 00:00:17]
Pick your LLM of choice. Your AI of choice.
Debra Rudd:
[00:00:17 – 00:00:33]
I actually love that people are using LLMs to ask questions because I’m getting so many more people who are coming to me saying an LLM told me this. Is it true? Does this apply to me? Do I need help?
Richard Taylor:
[00:00:35 – 00:02:04]
Welcome to Expat Wealth, a Plan first wealth podcast dedicated to helping ambitious expatriates in America and Americans overseas thrive. I’m your host Richard Taylor, and Plan first wealth is the business I founded and run today and we work with successful expatriates and immigrants and internationally minded Americans to make the most of their opportunity and avoid the expat landmines. First, a quick disclaimer. While Plan First Wealth LLC is an SEC Registered Investment Advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views and positions of Plan First Wealth. Information presented is for educational purposes only. Now, if you aren’t already receiving our emails, please please go to our website, planfirstwealth.com and sign up there. It’s free and you’ll be notified every time we drop a new episode. And so much more. Okay, let’s get back to this week’s show. Welcome back to another Ask An Expert show. This week I am joined by Deborah Rudd. Deborah is a CPA at Hodgen Law. Hodgen Law are a firm of tax attorneys and accountants providing cross border tax planning for multinational families and service corporations. Deborah has been with Hodgen Law PC for over 15 years focusing on expatriation planning projects and multi year cleanup projects for tax returns. Sounds very intense. Multi year cleanup projects for tax returns. I’m sure there’s plenty of them. So without further ado, let’s get into this. Hi Deborah, welcome to Expat Wealth.
Debra Rudd:
[00:02:05 – 00:02:07]
Thank you for having me. Good to be here.
Richard Taylor:
[00:02:07 – 00:03:23]
Let’s get straight into it. So I’ve actually, I’ve actually done at least one podcast with tax attorney on expatriation leaving the US and I referenced it in many more. But the reason I wanted to have you on today is I want to do this now purely through the lens of a green card holder. So whereas previously I’ve talked about expatriation, expatriating for green card holder, for anyone a green card holder or a citizen. And my hunch is that when someone’s expatriating as a citizen, the process to do it, the bureaucratic process, is. Is so involved. And also the repercussions are so, you know, giving up the citizenship is a major thing, even before we get into taxes. It’s a major thing that, in my experience is that people do research on this, they talk to people, they look into it online, and they understand the process and also the potential ramifications, the tax ramifications. Whereas when people on a green card, people are completely unaware that there is any such process to give up a green card, and they are equally completely unaware of the seismic and potentially life, lifelong consequences that can come from leaving the US On a green card and not dealing with it effectively.
Debra Rudd:
[00:03:24 – 00:03:45]
Yeah. More and more I’m working with green card holders who have actually done some research upfront before they got the green card, and they’re planning ahead to make sure that they don’t have it long enough that they’ll become an expatriate when they terminate the green card. I’m seeing more and more of that, which is really great. And I love working on those projects because we can avoid some really bad stuff.
Richard Taylor:
[00:03:46 – 00:04:03]
The life of an expat is inherently changeable. You know, I can’t tell you the amount of people I’ve met who said, I’m never leaving the US who have since left the US One day you wake up and you feel differently and you want to go home or you want to go somewhere else. And people do. Not everyone, but, you know, it’s inherently changeable.
Debra Rudd:
[00:04:03 – 00:04:19]
Yeah. And especially people who have citizenship in another country or grew up in another country. It’s not the same as, you know, me, for example, I grew up in the US and truly probably will never leave because it’s just, you know, my entire life is here. But for someone growing up in other country, it just totally makes sense.
Richard Taylor:
[00:04:20 – 00:04:27]
Why do you think you’ve, like, why. Where’s the passion for expatriation projects come from? Why do you think this is quite a niche within a niche. How? Why?
Debra Rudd:
[00:04:29 – 00:05:52]
I think part of it is that it’s such a big decision point in people’s lives. And there’s some really, you know, if you don’t know what you’re doing, you can really do terrible things to your life by just pulling the trigger on expatriation without knowing what you’re getting into. And I really like, you know, I feel like it’s somewhere I can help. It’s somewhere I can make an impact and prevent bad things from happening. And you know, I’ve seen situations where, when I got my start in tax, it was during the whole 2009 OVDP situation where we had this look back period where we had to do reporting for people’s accounts, foreign accounts that they had. We had like a, I forgot it was a six or eight year look back period. So we were looking at like 2002 through 2008. And if you remember that period in time, part of that era was very prosperous. And then the stock market took a massive nosedive in 2008. We were having our clients pay penalties based on the highest balance during that time period in their foreign accounts. So people’s foreign accounts went up. They had a high balance in 2004, 5, 6, and then the account value went down by 2008. And so they had very little money left in the account but they had to pay a penalty based on the high balance. So I was working with clients who were getting their entire, you know, life savings wiped out by IRS penalties just so they could sleep at night.
Richard Taylor:
[00:05:52 – 00:06:38]
You have seen that happen? Yes, because you know, one of the things that gets lobbed at me occasionally in webinars and other places when I’m explaining the potential consequences of non compliance with the irs, sometimes I will get someone lob a comment on me like, yeah, but how often does this happen in reality? Almost like accusing me of scaremongering and. Or everyone we’ve ever worked with is in, if they’re in non compliance, it’s accidental, not intentional. And most people voluntarily want to come into compliance. And for that reason there are programs, what you’ve just mentioned, one, there are programs that people can take advantage of that limit the potential penalties as a result. I’ve never seen someone like ruined by this. But you have essentially seen this.
Debra Rudd:
[00:06:38 – 00:06:54]
Yeah, I’ve seen, I’ve seen what people would consider as sort of, I mean maybe they had other retirement plans or accounts, but sort of. I’ve seen them have to give up a massive portion of their big nest egg that they were relying on going into old age.
Richard Taylor:
[00:06:55 – 00:07:07]
Was it ovd? So you’re talking about the one where there has been some intentionality. Right. You don’t qualify for the non willful, the more lenient package.
Debra Rudd:
[00:07:07 – 00:07:16]
So what I’m talking about was my experience back in, it was like 2010, 2011, before they started putting people into streamline.
Richard Taylor:
[00:07:16 – 00:07:18]
There was one option and it was.
Debra Rudd:
[00:07:18 – 00:07:35]
That’s. Yeah, I believe that was the case at the time. And then they offered like an opt out after a year or two of working with clients. I remember there was an opt out situation where people could, they had entered the ovdp, but then they could change their mind and opt out into streamlined procedure instead.
Richard Taylor:
[00:07:35 – 00:07:37]
Oh, really? Okay. Right, right, right.
Debra Rudd:
[00:07:37 – 00:07:46]
And some people were choosing to do that and getting much better results. But at the beginning, the first people who went through that, there were some bad situations. There were some bad results.
Richard Taylor:
[00:07:46 – 00:08:18]
And I just want to. So what you’re referring to is when people go through these, these route into compliance, you go back and, and do six, or in some cases, three. Six. And it used to be, I think, eight years. Tax returns and penalties are based on the end year values, but the highest year. So if you go back six years, it. The penalty based on which was the highest value. And to your point, you know the, if you’re doing this in 2008 when the markets fell like 50 and they fixed the penalties two years earlier when the market peaked. Yeah, that’s gonna, that’s gonna really hurt. Wow.
Debra Rudd:
[00:08:18 – 00:08:47]
Yeah. And so just that experience working with people who had inadvertently ended up in terrible tax situations, that just had massive impacts on their, on their emotions, on their personal lives, on their family relationships, that kind of, I think, really inspired me to want to find some area where I could help people before the bad things happen. And I think that’s kind of a big part of what led me into the expatriation area eventually.
Richard Taylor:
[00:08:47 – 00:08:55]
All right, very interesting. Right, well, let’s get into it then. So on a green card, you’re going to exit the U.S. why are we raising the alarm bells for citizens?
Debra Rudd:
[00:08:55 – 00:09:40]
It makes sense, right? When you’re a citizen and you leave the US you might have to pay what they call an exit tax. What’s really strange is if you have a green card, if you’re a permanent resident but not a U.S. citizen, and you’ve had the green card for long enough as the IRS defines it, if you’ve had the green card for a long enough period of time, and then you give up the green card, you also could be subject to exit tax. So even though you were never a citizen of the United States, you were a US Taxpayer long enough as a permanent resident, you terminate that status, and suddenly the IRS wants you to pretend you sold all your worldwide assets, even the stuff you accumul accumulated, before moving to the US and pay the IRS a tax on any gains that you’ve accumulated.
Richard Taylor:
[00:09:40 – 00:09:49]
Yeah. And not just that, though. The exit tax is what gets all the headlines but there’s, there’s the. If you’ve got US Citizen kids, there’s a potentially a lifelong transfer tax to them.
Debra Rudd:
[00:09:49 – 00:10:23]
That’s even worse than the exit tax. Yeah, absolutely. That’s actually. And I’d say most of the time when I’m doing planning projects with people, they approach me to talk about exit tax, and we talk about exit tax. But then I say, but the bigger problem might be the section 2801 inheritance tax, or just even in the case of people who don’t have U.S. citizen children, you still have U.S. estate tax. If you keep your U.S. assets after expatriation, but you lose the 15 million unified credit.
Richard Taylor:
[00:10:23 – 00:10:34]
Oh, so you go down to about $60,000 or something. So anything you keep in the U.S. property investment portfolio, you would get $60,000. And anything after that, it’s 40% tax. Right, okay.
Debra Rudd:
[00:10:34 – 00:10:59]
Yeah, exactly. So estate tax is a problem. Estate tax is a problem whether you’re a covered expatriate or not, whether you’re paying exit tax or not, if you continue to have U.S. assets. But then, you know, you’re right that the section 2801 is an inheritance tax on all your worldwide assets that could go to a US Citizen heir or a US Resident as defined under the gift and estate tax rules.
Richard Taylor:
[00:10:59 – 00:11:07]
Okay, so you mentioned, you mentioned it there. Covered expatriate. So this exit tax transfer tax, this only applies to covered expatriates, Right?
Debra Rudd:
[00:11:08 – 00:11:08]
Right.
Richard Taylor:
[00:11:08 – 00:11:13]
I’m on a green card. When do I become a covered expat?
Debra Rudd:
[00:11:13 – 00:12:12]
There’s three potential triggers to make you a covered expat. And there’s some, some exceptions to the rules, too. The two easiest to get caught in, the two easiest traps are, Number one is the certification test. You have to be able to say, they say under penalty of perjury, anything you sign on a tax return is under penalty of perjury. Really? But you have to say that you’re five years before the expatriation year, you filed your tax returns correctly and completely, and you paid all your taxes. And that seems like an easy thing. But a lot of times, probably the biggest issue is a lot of people have foreign pensions or foreign retirement accounts that they never knew they needed to report on their US Tax returns. So it’s time to expand expatriate, give up the green card, and they realize, oh, wait, I never reported this account on my form 8938 every year. So now I have to go back and fix that. And, oh, by the way, was I also supposed to file a Form 3520 because it was considered to be a foreign trust.
Richard Taylor:
[00:12:12 – 00:12:35]
I just want to jump in here and say in my experience almost. So we only work with expatriates. So every single person we come into contact with has some level of like non U S complication in their affairs. And I would posit that almost every single one is in some form of non compliance. There is always some forms missing. Always, Always, always, Always.
Debra Rudd:
[00:12:36 – 00:13:34]
Yeah, and, and a lot of times it’s really trivial stuff when you think about it. Like I have this foreign retirement account that’s worth, you know, 40, 000 US dollars and it accumulates a little bit of, of investment growth each year. But I’m supposed to be filing this whole other set of forms like 3520, 3528 to report it as a foreign trust. When you know, if you look at the tax treaty, it’s not even taxed under the treaty, so why am I doing this? But that ends up being the result in a lot of situations. So that’s one trigger for covered expatriate status is non compliance over the last five years. And as you mentioned, non compliance is. It sounds bad, but it’s such a common thing because people just think like, you know, my 401k or my IRA, I don’t have to worry about doing any special reporting for that. So why would the foreign equivalent of that require special reporting? It doesn’t in the other country. Why would it in the US So very, very common.
Richard Taylor:
[00:13:35 – 00:14:07]
So if that, if that was the only test, I guess that’s a relatively easy one to fix. By relatively easy I don’t mean free, you know, because you might, that’s. I guess that goes back to this multi year cleanup exercise that you talk about where you’ve got to go back three or in this case, I guess five years and file amended returns. And whether you do that through an approved program or not, whether there’s penalties, you know that that’s all facts and circumstances of the individual, I guess. But if that was your, that was the only test, it sounds like that that could be remedied.
Debra Rudd:
[00:14:08 – 00:14:37]
Yeah, it’s not too bad. Where things get worse is there’s also a net worth worth test. And this is the one that catches more and more and more people because they don’t apply an inflation index to this number. So if your net worth, your personal net worth is US $2 million or more, then you’re a cumbered expatriate. And this is worldwide assets, worldwide Assets doesn’t matter when you acquire them.
Richard Taylor:
[00:14:37 – 00:14:38]
Including pensions?
Debra Rudd:
[00:14:38 – 00:15:03]
Yep, including pensions. So it includes present value of pensions. I’ve unfortunately talked to a lot of clients who said, you know, I’m starting to receive pension distributions. So that’s increasing my wealth by $10,000 per month because I have this pension income. And I have to unfortunately tell them, no, you already are considered to own the entire present value of that pension, not just $10,000 this month and $10,000 next month.
Richard Taylor:
[00:15:03 – 00:15:06]
It catches defined benefit pensions as well.
Debra Rudd:
[00:15:06 – 00:15:07]
Yes.
Richard Taylor:
[00:15:07 – 00:15:09]
Even ones that aren’t in payment, Correct?
Debra Rudd:
[00:15:09 – 00:15:10]
Yep.
Richard Taylor:
[00:15:10 – 00:15:10]
Wow.
Debra Rudd:
[00:15:11 – 00:16:06]
Yeah. So that all goes into your net worth calculation. Beneficial interests in trusts. So if there’s a trust where you’re a beneficiary, even if you haven’t received distributions, but you might, you have to calculate your beneficial interest in a trust as well. So there’s a lot of areas that are kind of gotchas, but the biggest thing is it’s $2 million, which is a smaller and smaller and smaller number that’s no longer an ultra wealthy person number. That’s, you know, a very common number to hit, especially if you’ve been as a lot of green card holders. Especially if you come to the U.S. maybe you work in tech, you spend 20 years working here, you got some stock options many years ago, and maybe it was Microsoft stock. And 20 years later, that stock is worth quite a bit more than it used to be. So. So yeah, you get over the 2 million pretty quickly in those cases.
Richard Taylor:
[00:16:06 – 00:16:46]
People don’. Move to the US for the good life. You know, the La Vita, if they’re going in search of that, they go somewhere else. People come to America because it is the undisputed champion of kind of capitalism. Right. They come here because they’ve got a tap on the shoulder, usually with their, with their employer. You fancy trying your hand in America and people take that because it’s such a tremendous opportunity. They come, in other words, they come here to really make it. So someone who’s come to America and has spent 10, 15 years on 20 years on a green card, in all likelihood in that time, has amassed a significant amount of wealth and all being well, is well beyond that 2 million barrier. That is going to catch a lot of people.
Debra Rudd:
[00:16:46 – 00:17:16]
Yeah, absolutely. And even, you know, it even captures, at this point in time, it even captures people who weren’t trying to amass a lot of wealth, who maybe moved to the US and, and married a US citizen and it was just a matter of love, you know, it wasn’t even about wealth and I’m seeing who have just over $2 million. Those are the saddest cases. Just a little more than 2 million. Just enough to put you into trouble. It’s, it’s just a much, much smaller number than it used to be.
Richard Taylor:
[00:17:17 – 00:17:19]
Okay, well, what’s the, what’s the third test?
Debra Rudd:
[00:17:20 – 00:17:59]
Third test is tax liability test. And this is probably the easiest one to pass. But if, if you are high income, it’s hard. And this one says if your net tax liability, and there’s a definition for that, it includes certain things, it doesn’t include other things, but basically your tax liability after you include foreign tax credits. If that number on average for the five years before expatriation is, I think the 2026 number is $211,000 or more, then that makes you a covered expatriate and that’s your tax liability, not your taxable income. Okay, so tax liability average 211,000.
Richard Taylor:
[00:18:00 – 00:18:27]
So that’s going to catch high earners. Yeah, the, the 2 million is going to catch a lot more people and the, the cumulative net worth figure and the five years worth of compliance is going to potentially catch everyone. But that can be remedied. But the problem is the rest can’t very easily. And we, and we should note as well, these tests don’t apply to everyone on a green card. Right. They apply to, on a green card if you considered a long term permanent
Debra Rudd:
[00:18:27 – 00:19:06]
residential long term resident. Yeah, that’s the term and it’s defined as anyone who’s had their green card in eight of the last 15 years. So not for eight of the last 15 years. There’s a really big distinction between in and for. In means during. So if you’ve had your green card for only one day of the year, that counts as one year towards the test. So you don’t look at it as I got my green card on November 25th. So next year at November 25th, I hit one year. It’s, you’ve had it on November 25th. So November 25th to December 31st is one year for a green card test, for the long term resident test.
Richard Taylor:
[00:19:06 – 00:19:14]
So the officially people hear the eight years number and think, oh, I’ve not had my green card for eight years. But really it can be more like six. Just over.
Debra Rudd:
[00:19:14 – 00:19:16]
Yeah, six years and two days.
Richard Taylor:
[00:19:16 – 00:19:17]
Yes, you can have potential.
Debra Rudd:
[00:19:17 – 00:19:22]
One day from the prior year, one day from the next year and you’re in eight years.
Richard Taylor:
[00:19:22 – 00:19:40]
So if I’ve had a green card for four years and I leave and I, and I go through the process of giving up my green card, which we’ll come back to in a second. I don’t need to worry about these tests. I’m not a long term resident and I don’t take, therefore I don’t take the tests, therefore I can’t be a covered expat. So I’ve got relatively. I’ve got nothing to worry about.
Debra Rudd:
[00:19:40 – 00:19:45]
If you terminate your green card before you hit the eight years, you’re not even an expatriate, you just.
Richard Taylor:
[00:19:46 – 00:19:46]
Oh, really?
Debra Rudd:
[00:19:46 – 00:19:57]
From a US Tax resident to a non resident and you don’t file Form 8854 to report an expatriation. You avoid expatriation entirely.
Richard Taylor:
[00:19:57 – 00:20:13]
Okay, interesting. Right? I didn’t know that. So let’s say now I do. I have been, I’ve had it for more than eight years. I’ve had it for 10 years. No question, I’ve had it for more than eight years. But I’m in compliance. I’ve got a net worth of a million dollars and I don’t hit the tax liability issue. What then?
Debra Rudd:
[00:20:14 – 00:20:49]
In that situation, you’re very similar to the person who never hit the eight years. You can terminate the green card. You’re not covered, so you don’t have to worry about exit tax. You convert from US Resident to non resident. And the only thing that’s different about you is you have to include Form 8854 with your tax return to report the fact that you expatriated and to report information about your expatriation and your net worth and your tax liability for the prior five years. So you put all your information on this one form, and this form shows the irs, hey, I expatriated, but I was not a covered expatriate.
Richard Taylor:
[00:20:49 – 00:20:55]
I, hey, I’m leaving. But look, I don’t, I don’t trigger any of these tests, therefore I’m not a covered expat. So please leave me alone.
Debra Rudd:
[00:20:55 – 00:20:56]
Exactly.
Richard Taylor:
[00:20:57 – 00:21:08]
Let me leave quietly. Now, I’ve been had a green card for 10 years. I’ve got a net worth of 5 million, let’s say ignoring the other tests, just that I trigger it on the basis of that, then what?
Debra Rudd:
[00:21:09 – 00:22:30]
So then you’re in a situation where hopefully you’re planning ahead before you terminate your green card. You’re thinking about what’s going to happen and you’re doing some research and maybe even talking to professionals and you want to look at. Okay, if I’m going to expatriate, I have two potential problems. One is I have exit tax and the other is the section 2801 inheritance tax. So first of all, you want to look at. Okay, is exit tax a problem? Yeah. So I have to pay exit tax, but what is my exit tax going to be? So it might not be bad. You get an exclusion. It’s the first nine hundred and something thousand dollars of gains are excluded from exit tax. If you have foreign pensions that were acquired before you became a US resident or citizen, you can exclude those from exit tax. So you don’t have to pay exit tax on those what, entirely depending on when they were accumulated? Yes. If you contributed into them once you became a US resident or citizen, then the portion attributable to that period could be subject to exit tax. But there is a rule in the exit tax rules, I think it’s 877 cap a D5, I believe, that says you can exclude pensions that were accumulated before you were a US resident or citizen.
Richard Taylor:
[00:22:30 – 00:22:37]
What about money purchased international pension? I didn’t contribute to it, but it grew and I received, you know, it received dividends and income with that.
Debra Rudd:
[00:22:37 – 00:24:16]
Yeah, yeah. I think because that’s all elocable to before you became a US resident or citizen, you get to exclude that. So just because you’re a covered expatriate doesn’t necessarily mean your exit tax is bad. Especially if you’re in that, that window where like maybe your net worth is $3 million, but your basis on everything is like $2 million. So you really only have a million of appreciation in your assets. Most of that will be wiped out by gain exclusion. Maybe foreign pension rules can make it so that you don’t have to pay extra tax on those. IRAs are bad. 401ks are good for exit tax. Like if you have a 401k, you can make it so that there’s no exit tax on that. Instead you just have a 30% withholding on distributions. But IRAs are bad. IRAs are a deemed lump sum distribution on the day before expatriation. Nothing you can do about that. So if you’re approaching exit tax and you’ve set your life up in the right way, exit tax itself might not be that big of an issue. But then you have to look at the other side of it, the inheritance tax. Are there going to be US people inheriting from you? And if they are, there’s a 40% tax on WE Worldwide assets that they inherit from you and they have to pay that tax at the time they inherit it. So let’s say you have a Swedish citizen, they were A green card holder move back to Sweden, give up the green card, their children inherit their real estate in Sweden and have to pay a 40% inheritance tax on the US with what, cash? Because what they inherited was real estate, not cash. So it can be a real problem.
Richard Taylor:
[00:24:18 – 00:24:21]
And you know the exit act itself can be a horrendous problem.
Debra Rudd:
[00:24:21 – 00:24:21]
Right.
Richard Taylor:
[00:24:21 – 00:24:22]
If you have.
Debra Rudd:
[00:24:22 – 00:24:22]
Absolutely.
Richard Taylor:
[00:24:22 – 00:24:43]
If you’re not a marginal case, if you’re 10 million net worth and the day before you leave, everything is deemed to have been sold or distributed, everything that’s included in the calculation, nothing has actually been sold or distributed. That can be devastating. You know, you’ve suddenly got to come up with hundreds of thousands, millions of dollars in taxes and you haven’t actually sold or liquidated anything.
Debra Rudd:
[00:24:44 – 00:24:50]
Right? Yeah, it’s, it’s a really big problem that gain exclusion only goes so far once the numbers start getting a lot bigger.
Richard Taylor:
[00:24:51 – 00:27:28]
I’m excited to announce that Expat wealth has its first sponsor, the Global Financial Planning Institute. The GFPI exists to provide education, community tools, resources and ongoing research for financial planners and other advanced financial professionals working with international and cross border clients in the US and Americans abroad. I’m a GFP Institute fellow and I’ve put all our employees through their GFPI programs when they join us. I’ve met some great people. I’ve learned a ton. It’s a genuine community of internationally minded folk doing their best to serve their clients properly and critically sharing what they know in the oftentimes challenging and ambiguous US cross border environment. And as anyone in this sector will tell you, you’re always learning. So if you work with international clients and or Americans abroad, or if this is an area you’re looking to get to, check out the gfpi@www.gfp.institute. you will be glad you did and I hope to see you there soon. This is why I wanted to make this episode specifically and only for Green Card holders. Although almost all of it applies to citizens as well who are giving up the citizenship. But to my point earlier, those aren’t the ones I’m worried about because they go into this with their eyes wide open. It’s those in a green card who all that potential stuff we just discussed applies to them. And much of it can be mitigated or at least managed through planning. But for reasons we’re about to discuss time and time again, these people are unaware of all this stuff, are unaware of the process to actively give up the green card and get themselves into some real pickles. So what I’m referring to is the amount of people who do not realize that there is a process to give up a green card. Both with uscis, the immigration services, like a formal process to give up your green card, and separately the form you mentioned earlier with the irs, if you’re a long term resident to file your tax return, they don’t realize that there’s this process and a lot of them think they can just leave the US with a green card. And you know, I’ve literally heard people say, oh, I’ll just, I’ll keep it in case I want to come back. And it, it terrifies me to think of the amount of expired and unexpired green card sat in drawers around the world of people who think they have left the us and literally, physically they have, but because they haven’t gone through this specific process, this bureaucratic administrative process of giving up their green card, in the IRS’s eyes and the US’s eyes, they haven’t given it up.
Debra Rudd:
[00:27:29 – 00:27:54]
Yeah, I, I just the other day I talked to someone who left the US in 2001 and never turned in the green card. And so he’s now, in 20, 25, 24 years later, he’s going to go file five years of US tax returns and do some pre expatriation planning and send in his expired green card and be an expatriate. 20.
Richard Taylor:
[00:27:54 – 00:27:55]
Yikes.
Debra Rudd:
[00:27:55 – 00:27:56]
Four years after leaving the US.
Richard Taylor:
[00:27:57 – 00:28:06]
Well, Deborah, I’ve got to just put, I can’t let that go. I need to ask questions. Why 24 years has he, have they been back to the US since? How did they become aware of this?
Debra Rudd:
[00:28:06 – 00:28:54]
Yeah, I don’t know all the facts of that particular situation, to be honest with you. It’s just someone I talked to, they just reached out and wanted to get some information about how it all works. And he had already gotten some prior advice from a tax lawyer and an immigration attorney and he was talking to me about tax returns. So he already had made his decision about this is what I’m going to do. But yeah, 24 years after leaving the US, moved to Canada and you know, did stop filing tax returns in the us. And so I think, you know, I don’t know if there was any sort of decision made or it was just kind of a life happens and you just carry on. Yeah, yeah, do what’s in front of you. You know, you just do what in Canada? You file your Canadian tax returns.
Richard Taylor:
[00:28:54 – 00:29:45]
I don’t want people to think that I’m like pointing fingers like, you know, when we left the UK or wherever you’ve come from, we just, most people just Upton left. There aren’t these lifelong, there isn’t this process to go through. It’s just, you know, you got, when you, when you are leaving, you’ve got a million things to think about. And because an exit tax and this whole regime is so unusual, people aren’t thinking of it, it just doesn’t occur to people and it can have real consequences. So this person left the US in 2001, didn’t get the green card. Well, as far as the IRS are concerned in the us, they’ve never, they’ve not left. They are still a US person. They should have been filing US tax returns every single year. They’re definitely a long term permanent resident because they’ve had the green card for however long, even though this particular green card will have expired decades ago and they can’t use it to actually gain entry back into the us. So it’s, it’s like the world, the worst of all worlds.
Debra Rudd:
[00:29:45 – 00:30:06]
Yeah, yeah, absolutely. And that’s why it’s just so, so important to do some planning ahead of time. And what’s really unfortunate is that people just don’t know they need to do planning. It’s not like people know there’s a problem and they say, eh, I don’t care, I’m not going to deal with that. That won’t be a problem for me. It’s people just literally don’t know.
Richard Taylor:
[00:30:07 – 00:30:25]
Yeah. What about a huge danger which is this has happened, someone’s left the US on a green card. They’ve not rescinded it, they didn’t realize they had to. A year, two years, three years later, they try and enter the U.S. let’s say on that green card, what could happen?
Debra Rudd:
[00:30:25 – 00:31:34]
Then again, I’m not an immigration lawyer and I don’t know the latest information about what happens in that particular situation if you, if you show up on an airplane coming into the us but anecdotally I had a client a few years ago who did this. She had been living outside the US for quite some time and was finally getting around to cleaning up everything in the US and she was planning to terminate her green card. But as part of this she needed to travel back to the US to sign some paperwork because she was selling a piece of real estate in the us so she was going to come into the us, I think, clean out the house, get rid of all the stuff inside of it, sign the paperwork, get the sale done. But when she hit the border, they said we need you to Sign this Form I407, and we’re going to take your green card. And so we got a frantic phone call at our office, and we said, well, we’re not immigration lawyers, but you need one right now. So we put her in touch with an immigration lawyer. I think what ended up happening was at that time, she was allowed to enter the US without signing the i407
Richard Taylor:
[00:31:34 – 00:32:26]
and turning in her green card, the i407. If she had signed that, that would have been her voluntarily giving up the green card on that day. Right. And people will sign this just thinking, oh, yeah, if I sign, I can. I can enter the US in, no problem. What they don’t realize is that by signing that, that is the expatriating event. And therefore this test for the exit tax happens essentially the day before. And it’s done with zero planning. So you get to the border, they ask you to sign this I407. And if you do so, they’ll tell you you’ll be able to enter the U.S. no problem. You sign it. Well, you have just expatriated and the US Is IRS is going to look at your world worldwide assets and you deem that you sold and distributed them all the day before, and you have done zero planning that can absolutely wreck your financial affairs. Wreck them.
Debra Rudd:
[00:32:26 – 00:33:27]
And thankfully, this client had already talked to us, and so she knew i407 was the green card termination. So when they asked her to sign it, she said, no, hold on, I need to talk to my advisor. So she called us. We put her in touch that day with an immigration lawyer. And I don’t know what happened in that conversation. I don’t know what they advised her, but somehow she was able to say, no, I’m not signing the i407 right now. And she got, I think they gave her a court date for a few months later, and she was allowed to enter the U.S. but I think she had to stay in the U.S. until that court date. So she was able to kind of wrap up her affairs in the US do what she needed to. Unfortunately, she ended up having to stay for, I think, two or three months when she was not planning to stay that long. So that ended up being an expensive trip, but she was able to do what she needed to. And then somehow, working with the immigration lawyer, she did end up voluntarily signing the i407. I think they avoided all the court proceedings because she was able to just take care of it and get back out of the country.
Richard Taylor:
[00:33:27 – 00:33:54]
So bear in mind this Client just turned up in the US Thinking, I’m making this up, but, you know, a couple of weeks, clean the property out, sell it, get back to my. My life, my family, in my home country. And instead she got waylaid at the border. She had to stay here for two or three months, you know, which I’m sure was expensive and unpleasant, but also gave her the opportunity to move stuff around and avoid the worst consequences of expatriating.
Debra Rudd:
[00:33:54 – 00:34:06]
Yeah, actually, she was. It was, it was difficult too, because she had to do things with accounts that were in other countries and she wasn’t able to be physically present there. So it was, it was complicated.
Richard Taylor:
[00:34:06 – 00:34:07]
Stressful.
Debra Rudd:
[00:34:07 – 00:34:08]
Yes.
Richard Taylor:
[00:34:08 – 00:34:10]
It must have been so stressful.
Debra Rudd:
[00:34:10 – 00:34:24]
I can’t imagine the level of stress. I don’t think I personally have ever experienced anything that stressful. So I, I try my best to relate and be empathetic, but I, I also don’t really have an anchor point in my experience for something that terribly stressful.
Richard Taylor:
[00:34:25 – 00:34:57]
I’m. This, this has a happy ending. She. She expatriated. She wasn’t a covered expat. I I assuming where the story is going, and she was able to leave without any immigration issues. So. So she kind of won. But blimey, that must be stressful. And it could so easily have gone the other way. Right. If she wasn’t already talking to you, if she’d got to that border and. And just signed the 407 on thinking, oh, this is, this is the solution. Not realizing that the cascade of consequences that would fall upon her or her family thereafter. Yikes.
Debra Rudd:
[00:34:58 – 00:35:17]
Yeah. And then also, too, I wonder about how many People sign the i407 and have no idea that they just dispatriated. And how long is it before they find out, you know, was. Is it two or three years later that they realized that they were supposed to pay an exit tax several years ago. That’s a problem too.
Richard Taylor:
[00:35:17 – 00:35:27]
That’s gonna be a problem getting back in. And if they did owe it, I assume, knowing the irs, as I do, interest and maybe penalties are growing ever thereafter.
Debra Rudd:
[00:35:27 – 00:35:45]
If you’re someone who you didn’t know you were expatriating, so you didn’t do anything to meet the certification test, for example, the five years of tax returns. But otherwise you wouldn’t have been a covert expatriate. There’s just all kinds of terrible permutations of situations that could happen there.
Richard Taylor:
[00:35:46 – 00:36:06]
Yeah, you could be under the 2 million, couldn’t you? And because you’re not in compliance, which no one is, and you’re certainly not going to have been, if you’ve been out in the US for two or three years, unknowingly that you weren’t to be doing returns. You’re de facto a covered expat, and then this whole regime falls upon you and your. And your covered expat ever after. Oh, man. Wow.
Debra Rudd:
[00:36:06 – 00:36:37]
I mean, I think we’re gonna enter a time when these types of things eventually become less possible just because there’s gonna be so much bureaucratic red tape that people will get caught somewhere along the way and will figure it out earlier than, you know, oops, I expatriated three years ago. Eventually we’ll get to a point where it’ll be less possible to end up in those situations. But we can’t rely on a system to save us. Like, the system is not designed to save us. The system is designed to catch us.
Richard Taylor:
[00:36:38 – 00:36:55]
You know, Deborah, I hope so. I don’t know though. I’ve been in the US for over 10 years now, and I am not sure that people are any more aware and knowledgeable on. On informational reporting than they were. Certainly not new people. It’s still.
Debra Rudd:
[00:36:55 – 00:36:55]
That’s fair.
Richard Taylor:
[00:36:55 – 00:36:56]
It still shocks me.
Debra Rudd:
[00:36:57 – 00:37:11]
I’m in the unique position of telling people about it all day. So I feel like more people know, but it’s only the people I’ve told. So your perspective is maybe a little more accurate than mine because I’m out here spreading the word on this.
Richard Taylor:
[00:37:11 – 00:37:25]
You know, this podcast is about that. But I’m still shocked by how often we’re getting the same questions, queries, and how many people are still caught out by Annari. And there’s so much more information out there about it now.
Debra Rudd:
[00:37:26 – 00:37:26]
Yeah.
Richard Taylor:
[00:37:26 – 00:37:40]
And as we, as we’re all more online, I don’t think more people must know. There’s so much more information about this than when I moved here. And we’re also conditioned to asking Google or now, which you pick your LLM of choice, your AI of choice.
Debra Rudd:
[00:37:40 – 00:38:09]
There’s. I actually love that people are using LLMs to ask questions because I’m getting so many more people who are coming to me saying an LLM told me this. Is it true? Does this apply to me? Do I need help? And it’s so much better that people are able to just ask a question and get some kind of information about their situation that says you might have a problem, you need to do something.
Richard Taylor:
[00:38:09 – 00:38:17]
We’ve actually found that far from replacing us is actually meant that people who are using LLMs will turn up to meetings with us Better prepared.
Debra Rudd:
[00:38:17 – 00:38:17]
Yes.
Richard Taylor:
[00:38:17 – 00:38:34]
And it means that we can like, we can, we don’t have to deal with like the 101 of like financial planning or 101 of portfolio management. We can skip that part. Or the 101 of, of being an expat in America. We can skip that and get straight to like the good stuff, the importance of the valuable stuff and that. And that’s been really useful.
Debra Rudd:
[00:38:35 – 00:38:53]
Yeah. It’s giving us better educated clients. I mean, LLMs can be wrong. Sure. But they get it right enough that people can ask really, really good questions about their situation and they can come into meetings knowing enough that it’s easy to have a conversation about technical stuff.
Richard Taylor:
[00:38:53 – 00:39:22]
Absolutely agree. You know, I wish there was a way we could get every green card holder in America to listen to this and even better, every single person on a visa. If you’re on a visa, you haven’t yet got a green card. Listen to this first. It might mean you never go for a green card. It might mean that you delay going for a green card knowing that you’ve got that eight, six to eight year window before you become a long term resident and therefore the covered expat questions apply. I wish we could get this to every single green card holder out there.
Debra Rudd:
[00:39:22 – 00:39:41]
And I’m working with an increasing number of people lately who have had the green card for four, four or five years and they find out that this could be a problem in a couple years and they talk to me ahead of that and make their plan and exit the US before this ever even catches them. So it’s.
Richard Taylor:
[00:39:41 – 00:39:42]
You have found people leaving?
Debra Rudd:
[00:39:43 – 00:39:54]
Yeah, yeah. I really like the people who are, you know, I like it for them that they’re able to find this information and plan ahead and avoid the bad situations.
Richard Taylor:
[00:39:55 – 00:39:59]
It’s a shame that people are leaving before they, you know, they naturally would do otherwise.
Debra Rudd:
[00:39:59 – 00:40:07]
But yeah, I mean that’s a whole, that’s a whole different immigration and tax policy conversation.
Richard Taylor:
[00:40:07 – 00:40:09]
We’re not going to cover that now.
Debra Rudd:
[00:40:09 – 00:40:09]
Don’t worry.
Richard Taylor:
[00:40:09 – 00:40:14]
I’m not going to ask you for your thoughts on that. Deborah. Where can people find you?
Debra Rudd:
[00:40:15 – 00:40:32]
You can find me on Hodgin.com Hodgen.com My email address, Deborah.Rudgin.com is the best way to reach me or find our website and reach out to us. We have our contact info there.
Richard Taylor:
[00:40:32 – 00:40:37]
I know on the firm Hodgin, you are attorneys and accountants.
Debra Rudd:
[00:40:38 – 00:40:38]
Yeah.
Richard Taylor:
[00:40:39 – 00:40:57]
So for people who don’t understand why I think that’s important, you do a lot of like compliance stuff and it means that you’re having your attorney and your accountant who, who you provide very different roles in that, in that compliance process within the same firm is, I think, a very useful setup.
Debra Rudd:
[00:40:58 – 00:42:02]
Yeah, I think as a cpa, I have potentially a lot of people’s kind of dream job, actually, because I have access to an experienced attorney right where I work. A lot of CPA firms don’t have that. A lot of accountants don’t have that. So from my own development as a cpa, everything started with Phil Hodgin, the owner of the firm, saying, well, what does the code say? You know, what do the regulations say? And at first I had no idea what he was talking about. But over the years I did learn all of this, obviously, but it’s just having that sort of tax law overlay as your first approach to understanding how tax returns work, it’s just incredibly valuable, especially when you’re, you’re working in international tax. So I, I very much appreciate that atmosphere as a, as an employee, as a, you know, as a return preparer, as an advisor. But yeah, absolutely. For clients, I think it’s, it’s an incredibly valuable thing.
Richard Taylor:
[00:42:02 – 00:42:13]
Well, thank you for coming on Expat wealth and talking us through that. I hope we can get this to as many current green card holders, future green card holders as possible and help them avoid making a big mistake.
Debra Rudd:
[00:42:13 – 00:42:18]
Yeah. Thank you so, so much for having me on. Really appreciate it and enjoyed our conversation.
Richard Taylor:
[00:42:18 – 00:43:20]
Me too. You’re very welcome. Thank you. Thanks, Deborah. See you soon. All right, folks, that’s another episode of Expat wealth under Our Belts. Thank you for listening. I appreciate it and I appreciate you. If you’re enjoying the show and would like to support, support the mission, which is to help ambitious expats thrive in America and ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review, this stuff really does matter. Please help us get this information to the people who need it, that is to your fellow expats. Just a quick reminder that this show is brought to you by Plan First Wealth. We are a US based financial planner and wealth manager and we help successful American and international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you, you can find us on our website, planfirstwealth.com or you can look me up on LinkedIn. Do get in touch, we’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next week.
Production