Many clients express their concerns about the U.S. worldwide taxation policy, fearing that once they obtain a U.S. green card, they will face significant tax burdens. This concern primarily arises from some domestic institutions that have a misunderstanding of this issue and have incorrectly promoted the meaning and specific rules of the U.S. worldwide taxation policy. Worldway's immigration experts have consulted U.S. attorneys to clarify several common misconceptions regarding U.S. taxation.
Misunderstanding One: Once you obtain a U.S. green card, the U.S. will tax the global assets (including those in China) of the green card holder. This understanding is completely incorrect. It is important to distinguish between assets and income. Assets are the wealth you have accumulated from the past to the present, while income refers to the earnings from investments, salaries, bonuses, and commissions in a given year. The U.S. worldwide taxation policy targets personal income, not personal assets. For example, if you have 2000 ten thousand RMB in rental real estate in China, generating an annual rental income of 200 ten thousand RMB, once you obtain a U.S. green card, the IRS will not require you to pay taxes on the 2000 ten thousand RMB real estate, but will only tax your 200 ten thousand RMB rental income.
Misunderstanding Two: Once you obtain a U.S. green card, all domestic income is subject to U.S. tax. The U.S. provides an annual tax exemption of nearly 90,000 USD for income earned from overseas. For example, if both spouses hold green cards and each earns 100,000 USD annually from China, if they file taxes separately, after deducting the 90,000 USD exemption, each would only need to report taxes on 10,000 USD of income. If this 10,000 USD has already been taxed in China, or if there are any business expenses in the U.S., deductions can still be applied, so after deductions, it is estimated that each person would only need to pay 1000-2000 USD in taxes.
Misunderstanding Three: Once you obtain a U.S. green card, the green card holder's Chinese company is also subject to U.S. tax. This is another completely incorrect understanding. The U.S. worldwide taxation applies to the individual green card holder. If a green card holder owns shares in a Chinese company, and the profits of that company are not distributed to the green card holder in the form of dividends, then the green card holder does not need to pay U.S. taxes on the profits of the Chinese company. For example, if a Chinese company owned by a green card holder earns 1000 ten thousand RMB annually, but the green card holder, as a shareholder, does not receive dividends from the company, then they do not need to pay U.S. taxes on the 1000 ten thousand RMB profit.
Misunderstanding Four: The IRS conducts strict audits, and once caught, there could be imprisonment. This is also a misunderstanding. The IRS has a cost issue regarding audits; generally, only 1% of total tax filings are audited each year. According to relevant information, the IRS focuses its audits on high-income individuals, specifically those with reported incomes exceeding 50,000-100,000 USD annually. This is because the cost of an audit can amount to tens of thousands of dollars, and if underreporting is discovered, in most cases, the IRS can only require the taxpayer to pay the owed taxes plus appropriate interest (generally 10% interest). If there is no certainty that an audit will uncover tens of thousands in underreported taxes, it is simply not worth the risk. Only high-income individuals are likely to underreport tens of thousands in taxes, which justifies an IRS audit.
In summary, considering that high-income individuals generally have domestic companies to retain business profits, and with an annual exemption of 180,000 USD for couples, along with domestic taxes and some U.S. business expenses that can be deducted from income, if annual domestic income is within 300,000 USD, they will generally not owe much in U.S. taxes, estimating that they will only pay 10,000-20,000 USD in taxes, which is only 5% of their income. Additionally, the likelihood of being audited for incomes under 50,000 USD is low. For those exceeding 50,000 USD, even if underreporting is discovered, as long as the owed taxes and interest are paid, that is sufficient. To truly become a target of the IRS, an annual income of over 100,000 USD is likely required. It is advisable for such individuals considering immigration to the U.S. to consult a tax accountant proficient in U.S. tax law to design a legal tax avoidance plan in advance, thereby minimizing their tax burden in the U.S.
Edited by: Worldway
