US Resident Status After Expatriation (Tax Pitfalls and Landmines)
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US Resident Status After Expatriation
Oftentimes, once a person formally expatriates from the United States by either relinquishing their lawful permanent resident status or renouncing their US citizenship — they will want to return to the United States. It is important to understand that even if a US person expatriates from the US, they can still become subject to US resident status in the future. If a person obtains a green card, becomes a US citizen or even just meets the Substantial Presence Test resident at a later date — they may become a US person and may even have to go through the expatriation process, again. With that said, there are some ways to try to avoid becoming a US person even if a person obtains additional US status.
Important Rule About Exemption Amount
The first thing to keep in mind for taxpayers who may have already formally expatriated and are considering going through the process again is that they only get one bucket of exemption. Therefore, if a person was to expatriate in the future for a second time and has already used up their exemption amount — they don’t get a new exemption amount — although they can use the remaining portion that they did not use in the first expatriation.
Substantial Presence Test
This Substantial Presence Test means that when a taxpayer who is neither a US citizen nor a Lawful Permanent Resident, but spends a sufficient amount of time in the United States over a three-year period, and does not qualify for one of the exceptions or exclusions using Forms 8843 or 8840, then they can become subject to US tax on their worldwide income similar to a citizen or resident. It is essentially a counting days test in which in the current year it is a one-to-one ratio; the prior year it is a three-to-one ratio, and two years back is a six-to-one ratio. It is important to note that if you meet the Substantial Presence Test, then you will become subject to US tax on your worldwide income. But, it is also important to note that if a person meets the Substantial Presence Test (and is therefore subject to US tax and reporting on their worldwide income accounts and assets) this does not count as being a “Lawful Permanent Resident” for the Long-Term LPR expatriate test.
31-Day Exception to the SPT Rule
One way to avoid meeting the Substantial Presence Test is to not be present in the United States for at least 31-days in the current year. If a person is not considered to be in the United States for at least 31-days in the current year then at least in the current year — they will not meet the Substantial Presence Test.
Closer Connection
Even if a person needs to Substantial Presence Test, if they are able to show that they have a closer connection to a foreign country or multiple countries, then they may be able to avoid the Substantial Presence Test — even if they meet the counting days requirement. In addition, if the person does not meet the closer connection exception there are some other exceptions available as well, such as being a student in the United States on an F-1 Visa for the first five years.
Lawful Permanent Resident
When a person becomes a Lawful Permanent Resident, those years count toward being a resident who may become subject to expatriation at a future date. Therefore, taxpayers who are considering becoming a Lawful Permanent Resident again will want to consider making a treaty election to be treated as a foreign resident and not a US resident since those years do not count toward the Substantial Presence Test. But it is very important to note, that if a person files a Form 8833 to claim to be treated as a foreign resident and they are already a Long-Term Resident — this will count as the expatriating act.
Treaty Election
As mentioned above, when a person is considered to be a US person because they are Lawful Permanent Residents — they may want to consider making a treaty election if they are in a treaty country. The timing of the election is important and of course, if the Taxpayer does not reside in a treaty country — then this exception would not apply.
US Citizens
US citizens are typically excluded from being able to make the type of election to be treated as a foreign resident and therefore if the person becomes a US citizen, then presumably they will be in a much more difficult position to avoid having to formally expatriate — and the goal should be to avoid covered expatriates status so that they can avoid the exit tax if it all possible.
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