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US Expatriation Tax: Exit Tax After Renouncing Citizenship

US Expatriation Tax: Exit Tax After Renouncing Citizenship

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US Expatriation Tax 2021

The US government taxes its citizens on their worldwide income irrespective of where they live. American citizens who give up their citizenship or cease to be “green card” holders are subject to a series of complex rules called the “exit tax”.

The US Expatriation Tax, aka Exit Tax, has been making a lot of noise lately with the new Biden tax plan. Many wealthy Americans are considering breaking their US tax residency to shield themselves from the significant tax hike. For that, an American will need to expatriate and go through paying the Exit tax.  Sections 877 and 877A of the Internal Revenue Code (IRC) apply to U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their status as a U.S. resident for federal tax purposes. Depending on the date you expatriated, different rules apply.

Expatriation On or After June 17, 2008

If any of the following statements apply to you and you expatriated on or after June 17, 2008, the new IRC 877A expatriation requirements apply to you.

– Your average annual net income tax for the five years before the date of expatriation or termination of residency exceeds a certain level adjusted for inflation ($151,000 in 2012, $155,000 in 2013, $157,000 in 2014, and $160,000 in 2015).

– On the date of your expatriation or termination of residency, your net worth is $2 million or more.

– You do not attest on Form 8854 that you have met all of your federal tax obligations in the United States for the five years before your expatriation or termination of residency.

You are a “covered expatriate” if any of these regulations apply to you.

On the earliest of four possible dates, a citizen will be viewed as surrendering his or her U.S. citizenship:

1) the date on which an individual renounces his or her U.S. nationality before a United States diplomatic or consular officer, provided that the renunciation is later validated by the issuing of a certificate of loss of nationality by the United States Department of State.

2) the date the individual submits a signed statement of voluntary relinquishment of U.S. nationality to the United States Department of State confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4), provided the voluntary relinquishment is later approved by the issuance to a foreign national of a foreign national of

3) the date on which the US Department of State issues a certificate of loss of nationality to the individual; or

4) the date on which a naturalized citizen’s certificate of citizenship is revoked by a US court.

Long-term residents, as defined by IRC 7701(b)(6), lose their status as lawful permanent residents if they:

1) the individual’s status of having been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or

2) the individual:

– begins to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and that foreign country, or

– does not waive the treaty advantages that apply to residents of the foreign country, and

– reports such treatment to the IRS on Forms 8833 and 8854.

Under IRC 877A, all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Regardless of any other rules of the Code, any gain deriving from the deemed sale is taken into account for the tax year of the deemed sale. Except for the wash sale regulations of IRC 1091, any loss from the deemed sale is taken into account for the tax year of the deemed sale to the extent otherwise provided in the Code.

The amount that would otherwise be includible in gross income due to the considered sale rule is reduced by $600,000 (but not to zero), with the amount updated for inflation for calendar years after 2008 (the “exclusion amount”). The exclusion amount for calendar year 2014 is $680,000. Refer to the Instructions for Form 8854 for other years.

Without respect to the exclusion amount, the amount of any gain or loss realised later (i.e., as a result of the property’s disposition) will be adjusted for gain and loss taken into account under the IRC 877A mark-to-market regime. A taxpayer can choose to defer payment of tax on property that has been deemed sold.

Refer to Notice 2009-85 for further information about the IRC 877A mark-to-market regime.

Individuals can now meet the new notice and information reporting obligations by using Form 8854, Initial and Annual Expatriation Information Statement, and associated Instructions. Individuals should certify (in accordance with the new law) that they have met their federal tax obligations for the five previous taxable years, and what constitutes notification to the Department of State or the Department of Homeland Security, according to the revised Form 8854 and its instructions.

If you expatriated before June 17, 2008, the rules in place at the time still apply to you. For more information, see Chapter 4 of Publication 519, U.S. Tax Guide for Aliens.

Expatriation After June 3, 2004 and Before June 17, 2008

The American Jobs Creation Act (AJCA) of 2004 modifies IRC section 877, which offers an alternative tax regime to certain expatriates. Individuals with an average income tax liability of $124,000 for tax year 2004, $127,000 for tax year 2005, $131,000 for 2006, $136,000 for 2007, or $139,000 for 2008, or a net worth of $2,000,000 on the date of expatriation, will be subject to the tax under the amended IRC 877. It also requires persons to declare to the IRS that they have met all federal tax obligations for the five years prior to expatriation, as well as annual information reporting for each taxable year during which they are subject to the IRC 877 provisions.

Furthermore, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following their expatriation in which they are present in the United States for more than 30 days, or 60 days in the case of individuals working for an unrelated employer in the United States.

Finally, even if they do not meet the monetary thresholds for the imposition of the IRC 877 expatriation tax, IRC 7701(n) states that individuals will be treated as U.S. citizens or long-term residents for tax purposes until they have notified both the Internal Revenue Service (via Form 8854) and the Secretary of the Department of State (for former U.S. citizens) or the Department of the Treasury (for former long-term residents).

IRC 6039G also mandates yearly information reporting for individuals who expatriated after June 3, 2004, but before June 17, 2008, for each taxable year during which they are subject to the regulations of IRC 877. Form 8854 is due on the same day as the individual’s U.S. income tax return for the taxable year is due, or would be due if one were necessary.

Individuals who expatriated after June 3, 2004, but before June 17, 2008, can complete the new notice and information reporting obligations under IRC 6039G by using Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions.

Expatriation On or Before June 3, 2004

Prior to the AJCA revisions, the expatriation tax requirements applied to U.S. citizens who have renounced their citizenship and long-term residents who have ceased their U.S. residency for tax reasons, if one of the main purposes of the action is to avoid U.S. taxes. If you do any of the following, you are believed to have tax avoidance as a primary goal:

1) Your net worth on the date of the expatriation act is $622,000 or more, or 2) Your average annual net income tax for the last 5 tax years ending before the date of the expatriation act is more than $124,000.

If you fit either of the above criteria, you may be able to get a ruling from the IRS stating that you did not expatriate to avoid paying taxes in the United States. You have one year from the date of expatriation to request this ruling. Section IV of Notice 97-19 contains material that must be included in your ruling request. The expatriation tax laws do not apply if you get this judgement.

The expatriation or US exit tax is imposed for a period of ten years after the expatriation process is completed. It is calculated in the same way as for expatriates who arrived after June 3, 2004, but before June 17, 2008. Individuals who renounced their US citizenship or long-term residents who ended their US residency on or before June 3, 2004, must file an initial Form 8854, Initial and Annual Expatriation Information Statement, for tax purposes. Publication 519, U.S. Tax Guide for Aliens, contains more thorough information on Expatriation Tax.

To comply with the notification obligations under IRC 877, individuals who renounced their U.S. citizenship or terminated their long-term resident status for tax purposes on or before June 3, 2004, must file a Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions. Publication 519, U.S. Tax Guide for Aliens, contains more thorough information on Expatriation Tax.

What Should You Do If You Haven't Filed An Income Tax Return After Renouncing US Citizenship?

Individuals who renounced their U.S. citizenship or terminated their long-term resident status for tax purposes after June 3, 2004 must certify to the IRS that they have satisfied all federal tax requirements for the five years prior to expatriation, among the various requirements contained in IRC 877 and 877A. Even if the individual does not satisfy the monetary criteria in IRC 877 or 877A, the individual will be subject to the IRC 877 and 877A expatriation tax provisions if all federal tax obligations have not been met for the 5 years prior to expatriation.

Individuals who have relocated should file all tax returns due, regardless of whether full payment can be paid at the time of filing. A late-filing taxpayer may be eligible for a payment plan, depending on their circumstances. After the plan is approved, all payment plans require continuing compliance with all filing and payment requirements.

The IRS published procedures in September 2019 for some individuals who have abandoned or intend to relinquish their U.S. citizenship and seek to comply with their U.S. income tax and reporting duties in order to avoid being taxed as a “covered expatriate” under IRC 877A. See Relief Procedures for Certain Former Citizens for more information on these procedures, including Frequently Asked Questions (FAQs) to help assess eligibility.

Refer to Filing Past Due Tax Returns for more information on what to do if you have not submitted your due federal income tax returns and are not qualified for the Relief Procedures for Certain Former Citizens.

US Tax Expatriation Rules: Non-Filing of The Expatriation Form Carries A Hefty Penalty

Anyone who has expatriated or terminated his or her U.S. residence status must file Form 8854, Initial and Annual Expatriation Information Statement, and associated Instructions, according to the Internal Revenue Service. If the person is subject to the alternative expatriation tax under IRC 877 or IRC 877A, Form 8854 must also be filed to meet the annual information reporting requirements of IRC 6039G. Failure to file Form 8854 when it is due could result in a $10,000 penalty.

Expats who have not met with the Form 8854 criteria are receiving letters from the IRS, which may include a $10,000 penalty if applicable.

The Form 8854 Instructions include information about the filing requirements, definitions, and step-by-step instructions for completing the form. A penalty may be imposed if the form is not filed, or if all of the required information is not provided, or if the information provided is erroneous.

The IRS published procedures in September 2019 for some individuals who have abandoned or intend to relinquish their U.S. citizenship and seek to comply with their U.S. income tax and reporting duties in order to avoid being taxed as a “covered expatriate” under IRC 877A. See Relief Procedures for Certain Former Citizens for more information on these procedures, including Frequently Asked Questions (FAQs) to help assess eligibility.

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