Tax Aspects And Requirements Of Expatriation Of Your United States Citizenship Or Permanent Residency (Green Card) (IRS Form 8854)
There are essentially two steps you must take to surrender your U.S. Citizenship which are commonly referred to as "Expatriation";
- You must address legal and political aspects of surrendering your citizenship with the U.S. State Department through the United States Embassies or Consuls throughout the world. You will be required to personally sit down with an Embassy or Consul Representative to discuss the repercussions of surrendering your citizenship. An example of the forms (Information for Determining U.S. Citizenship) should be reviewed and completed in advance. The US Embassy will not allow you to surrender your citizenship until you have citizenship in another country. Note: You should also keep in mind that it is rumored that the U.S. makes it very difficult later to try to reacquire US citizenship after you voluntarily renounce it. You may have to acquire a visitor's visa in order to visit the US after you renounce your Citizenship or Permanent Residency. Our clients who have surrendered their Citizenship have not encountered any problem getting a Visitor's Visa afterwards, but the granting of such a Visa is totally at the discretion of the State Department and can be denied without due process.
- You must file the required forms with the Internal Revenue Service and satisfying their requirements. You will be required to file Form 8854 with the IRS and bring your income tax return filings up to date before you surrender your citizenship or green card. This form cannot be filed until the end of the calendar year of the expatriation because the IRS issues new forms for each calendar year in December.
Generally, the actual act of expatriation for a U.S. citizen for tax purposes occurs when an individual formally renounces U.S. citizenship. A U.S. citizen is treated as relinquishing citizenship on the earliest of the following dates:
- The date on which you renounce nationality before a diplomatic or consular officer of the U.S.;
- The date on which you furnish a signed statement of voluntary relinquishment to the U.S. Department of State;
- The date on which U.S. Department of State issues to you a certificate of loss of nationality; or
- The date on which a U.S. court cancels a naturalized citizen’s certificate of nationalization.
Note: A renunciation or relinquishment must be subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State. A green card holder is deemed to have expatriated on the date that lawful permanent resident status ceases. This generally occurs either on the date a green card is determined to have been revoked or judicially or administratively abandoned, or on the first day of a tax year for which a long-term permanent resident invokes a tax treaty to be treated as a resident of a foreign country and does not waive the benefits offered by the treaty to residents of such foreign country.
Both parts must be completed in order to successfully terminate your citizenship.
To surrender your Green Card (permanent residence status) you must meet with and fill out the proper forms with the Office of Homeland Security and also file the proper forms with the IRS to end your obligation to continue to pay US income taxes. There is normally a charge of $450 for this process.
Potential Tax Ramifications of Renouncing Citizenship
Expatriation on or after June 17, 2008, may cause an expatriate to be subject to IRC § 877A, which was enacted as part of the Heroes Earnings Assistance and Relief Tax Act (HEART) Act of 2008. Generally, IRC § 877A imposes income tax on the net unrealized gain on property held by certain U.S. citizens or green card holders who terminate their US residency as if their worldwide property had been sold for its fair market value on the day before the expatriation or residency termination (mark-to-market tax).
Who Does This Apply To?
The provisions of IRC § 877A apply to all U.S. citizens and former long-term permanent residents who expatriate on or after June 17, 2008, (a covered expatriate) if they meet any of the following three tests:
- Net Income Tax Test: For the five-year period before expatriation, the individual had an average annual U.S. income tax liability of at least $147,000 in 2010 (this number will be adjusted annually); or
- Net Worth Test: The individual’s net worth is at least $2,000,000; or
- Certification Test: The individual fails to certify that he or she satisfied all applicable U.S. tax obligations for the five years before expatriation.
A long-term permanent resident is any individual who was a lawful permanent resident (green card holder) for any part of at least 8 of the last 15 taxable years.
Exceptions may be applicable for certain individuals with dual citizenship and individuals who relinquish citizenship prior to age 18½.
Imposition of Mark-to-Market Tax
As previously indicated, IRC § 877A subjects a covered expatriate to an income tax on the net unrealized gain on their worldwide property as if the property had been sold for fair market value on the day before expatriation. Losses may be taken into account, but only to the extent of gains. Thus, application of the expatriation rules may not result in a loss for tax purposes. The first $600,000 (indexed annually) of net gain is excluded for each expatriating individual.
A basis adjustment is applied to all property subject to the deemed sale provisions to ensure that a future sale does not result in double taxation as a result of the application of the deemed sale rules. For purposes of determining the basis of property subject to the deemed sale rules, property that was held by an individual on the date the individual first became a resident of the U.S. may be treated as having a basis equal to the fair market value of such property on the residency start date. An individual may elect not to have this step-up in basis apply. Basis of property acquired after the residency start date would be computed under the standard basis rules.
Special rules apply to certain deferred compensation assets, certain interests in foreign trusts, and specified tax-deferred accounts.
Deferral of Tax
An election may be made to defer payment of the mark-to-market tax imposed on the deemed sale of property. Interest is charged, the election is irrevocable, and bond (or other security) must be furnished. Generally, the deferred tax is due when the return is due for the taxable year in which the property is disposed, but may not be extended beyond the due date of the return for the taxable year which includes the individual’s death.
Treatment of Nonqualified Deferred Compensation
Special rules are applicable for an eligible deferred compensation item. Generally, an eligible deferred compensation item is any deferred compensation item with respect to which
- The payer is either a US person or certain non-US persons who elect to be treated as a US person for purposes of withholding, and
- The covered expatriate notifies the payer of the covered expatriate status and irrevocably waives any claim to withholding reduction under any US treaty.
With respect to the payment of an eligible deferred compensation item (including certain qualified retirement plans, foreign pension plans, deferred compensation, or property transferred in connection with the performance of services to the extent not previously included in income under IRC § 83), the payor must deduct and withhold 30 percent of the payment. A payment is subject to withholding to the extent it would be included in the individual’s gross income if the individual was subject to tax as a U.S. citizen or resident. The payment is also subject to tax under IRC § 871.
If a deferred compensation item is not an eligible deferred compensation item (and not subject to IRC § 83), an amount equal to the present value of the deferred compensation item is treated as having been received on the day before the expatriation date. For a deferred compensation item subject to IRC § 83, the item is treated as becoming transferable and no longer subject to a substantial risk of forfeiture on the date before the expatriation date. Adjustments are made to subsequent distributions to take into account this treatment. Additionally, the deemed distributions are not subject to early distribution tax.
These rules do not apply to the extent the deferred compensation is attributable to services performed outside the US while the covered expatriate was not a citizen or resident of the US.
Specified Tax Deferred Accounts
For specified tax-deferred accounts (such as individual retirement plan, qualified tuition plans, a Coverdell education savings account, a health savings account, and an Archer MSA), the account is treated as having been distributed on the day before the expatriation date. The deemed distribution is subject to income tax at ordinary income rates, however, the penalties normally applicable to early withdrawals do not apply to a deemed distribution under the expatriation rules. A basis adjustment is made to reflect the taxation incurred as a result of the deemed distribution under the expatriation rules.
Gifts and Bequests from a Covered Expatriate
A U.S. person who receives a gift or bequest from a covered expatriate is subject to U.S. tax on the receipt of such gift or bequest. For this purpose, a gift or bequest includes property acquired by gift directly (or indirectly) from a covered expatriate or directly (or indirectly) by reason of the death of a covered expatriate. The total value of the gift is first reduced by the available annual exclusion ($14,000 for 2013 plus; this number is indexed annually), and tax is then assessed at the highest applicable gift tax rate at the time of the gift (in 2015, the top gift tax rate is 40 percent). Special rules apply to gifts or bequests made to domestic or foreign trusts by a covered expatriate.