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Three US Tax Differences Between a Green Card and US Citizenship

As we’ve covered in prior articles, the tax implications involved with US citizenship or Green Card Status can be complex. But, is there any difference between the two?


Whilst both US citizens and green card holders are considered to be “US Persons” and thus subject to US tax law, there are indeed differences when living in New Zealand. Whilst obtaining US tax advice is always essential to fully understand these differences, we can go over some of the main areas of discussion.


We’ll cover here three key differences between a US citizen and Green Card Holder, living in NZ:


1.      The Savings Clause


You might already be scratching your head here…


The savings clause is a section of the New Zealand – US double taxation treaty (DTA), which in essence, means that the US can tax its citizens as if the treaty did not exist.


Key word here….citizens.


So, whilst there are numerous benefits and provisions to prevent double taxation in the DTA, some of these are not applicable to US citizens. This doesn’t mean however that all US citizens are subject to double tax, but that there is a more flexibility available for green card holders.


2.      Tax Residency


The DTA affords the ability for an individual to “tie-break” their tax residency to a certain country, where they have closer ties and are maintaining their life. This treaty section can be used to make an individual non-resident of the USA for tax purposes, and only tax resident in New Zealand.


This can be hugely advantageous, as it can prevent the need to file complex US tax returns each year, reporting all NZ income and assets (such as KiwiSaver).


However, for US citizens, we go back to the savings clause again. As the ability to “tie-break” is a benefit provided by the treaty, this means the savings clause comes into effect which prevents US citizens from claiming this benefit.


On the other hand, green card holders can indeed claim the “tie-breaker” benefit, to end US tax residency.


This absolutely needs US tax advice first before attempting this process, as the implications can be severe. In addition, by using the “tie breaker” it can affect your green card status, and US immigration advice should also be sought


3.      Exit Tax Upon Giving Up Green Card


As you may have seen in my prior articles, some US citizens who renounce citizenship can be subject to an exit tax upon departing the US tax system.


However, whilst this can apply to green card holders (who relinquish their status), not everyone is captured here. Instead, a test applies, whereby the amount of time spent in the US is considered, and also whether the individual was tax resident of another country (referring to point 2).


US tax advice is highly recommended if you are considering giving up your green card


Summary


We’re often asked to provide US tax advice on switching from Green Card status to US citizenship, and also on giving up a green card. Our friendly US tax consultant David Tzimenakis specialises in this area, and advice is definitely recommended to ensure that accidental tax traps are prevented.


An incorrect early decision can have significant consequences in later times.

If you’d like to discuss further, reach out today – info@usatax.nz – 09-242-3446

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