It is well known that in the United States, individuals deal with taxes from birth to death. Therefore, many people believe that the United States is a high-tax country; however, data shows that among developed countries, the United States has one of the lower tax burdens. In terms of overall income taxes, including state taxes, local taxes, social security, and health insurance, Americans pay 31% of their income, which is lower than the average of 36% across 34 developed countries. Including all taxes, such as income tax and sales tax, the United States ranks as the fourth lowest tax burden country.
Many American investors wish to obtain a green card but have certain concerns. The primary concern is the fear of the United States' global taxation policy, worrying that once they obtain a U.S. green card, they will have to bear significant tax burdens. Today, 86 Study Abroad Network will clarify these misunderstandings for you:
Misunderstanding One: Once a green card is obtained, the United States will tax the global assets (including those in China) of the green card holder.
This understanding is entirely incorrect. One must understand the difference between assets and income. Assets are the wealth you have accumulated from the past to the present, while income is the investment returns or wages, bonuses, and commissions you earn within a year. The U.S. global taxation policy targets personal income, not personal assets. For example, if you own real estate worth 20 million RMB in China and earn 500,000 RMB in rental income annually, upon obtaining a U.S. green card, the IRS will not require you to pay tax on the 20 million RMB property, but only on the 500,000 RMB rental income.
Misunderstanding Two: Once a green card is obtained, all domestic income must be taxed by the United States.
China and the United States have signed a tax exemption agreement, which ensures that taxpayers in both countries do not have to pay double taxes, only needing to pay the difference in tax rates between the two countries. In other words, when a Chinese citizen holding a U.S. green card (who is taxed on global income according to U.S. tax law) or a U.S. citizen earning income in China pays income tax in China, they do not need to pay income tax again in the United States; they only need to pay the difference. However, the fact is that for most tax categories, tax rates in China are higher than those in the United States. Therefore, no difference needs to be paid.
Misunderstanding Three: Once a green card is obtained, the green card holder's Chinese company must also pay U.S. taxes.
This is another completely incorrect understanding. The U.S. global taxation applies to the individual green card holder.
If a green card holder owns shares in a Chinese company, the profits generated by that Chinese company do not need to be taxed in the United States unless distributed as dividends to the green card holder. For instance, if a Chinese company owned by a green card holder earns 10 million RMB annually, but the green card holder as a shareholder does not receive dividends from the company, then there is no need to pay U.S. taxes on the 10 million RMB profit.
Misunderstanding Four: The IRS conducts strict audits, and once caught, there will be severe penalties.
This is also a misconception. The IRS has a cost issue with audits; typically, only 1% of total tax returns are audited each year. According to relevant information, the IRS focuses its audits on high-income earners—those reporting incomes of over 500,000 to 1 million USD annually. Because an IRS audit demands significant resources, costing an estimated several tens of thousands of dollars, if someone has only a minor taxable amount, it is not worth the effort for the IRS to audit. Only high-income individuals may potentially miss tens of thousands in taxes, making it worth auditing.
Misunderstanding Five: The tax burden in the United States is so high that the wealthy are seeking to renounce their U.S. citizenship.
You may be aware that the wealthiest individuals in the world are mostly in the United States. Whether it is Bill Gates and Warren Buffett, the top two on the global wealth list, or Madonna and Kobe Bryant, who can generate vast incomes in an instant, do they wish to avoid high taxes? If they were truly overwhelmed, wouldn't changing their nationality be easy? Is it the United States that does not allow them to change? Or is it some other country that does not welcome them? Certainly not.
The reason is simple: they believe it is unnecessary, or simply put, they do not incur high taxes! If you have closely followed Warren Buffett's remarks in recent years, you will understand; he has admitted that he actually pays less tax in a year than some employees in his company.