The tax requirements of being a US citizen or Legal Permanent Resident do not disappear when a person makes the decision to expatriate from the United States. In other words, just because a person decides to renounce their citizenship or relinquish their green card does not mean that all of their tax responsibilities to the United States are through.

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In fact, the Internal Revenue Service has a specific tax for individuals who are seeking to give up their status or “expatriate” from the United States. Depending on which date a US person expatriates from the United States, along with certain other requirements, will determine whether you owe any additional money to the United States.

The following is a summary of IRS instructions 8854, which involves expatriation. This article will focus on individuals who are expatriate after June 16, 2008 since that is the most recent set of laws.

                                                    

Who Must File

If you expatriated after June 16, 2008, the expatriation rules apply to you if any of the following statements apply.

  1. Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next:
  2. $139,000 for 2008.
  3. $145,000 for 2009.
  4. $145,000 for 2010.
  5. $147,000 for 2011.
  6. $151,000 for 2012.
  7. $155,000 for 2013.
  8. $157,000 for 2014.

2. Your net worth was $2 million or more on the date of your expatriation.

3. You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.

4. You expatriated before 2014 and you:

  • Deferred the payment of tax,
  • Have an item of eligible deferred compensation, or
  • Have an interest in a nongrantor trust. Covered expatriate.

You are a covered expatriate if at least one of the statements in paragraphs (1), (2), or (3), set out above (under Who Must File) applies. Exception for dual-citizens and certain minors. Dual-citizens and certain minors (defined next) will not be treated as covered expatriates (and therefore will not be subject to the expatriation tax) solely because one or

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing. both of the statements in paragraph (1) or (2) above (under Who Must File) applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) above (under Who Must File).

                                                    

Certain Dual-Citizens

You may qualify for the exception described above if you meet both of the following requirements. You became at birth a U.S. citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519. Certain minors.

You may qualify for the exception described above if you meet both of the following requirements.

  • You expatriated before you were 18
  • You were a resident of the United States for not more than 10 tax years before the expatriation occur.

For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

                                                    

Taxation Under Section 877A

If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). This applies to most types of property interests you held on the date of your expatriation. But see Exceptions below.

Gains from deemed sales are taken into account without regard to other U.S. internal revenue laws. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. However, section

1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. For 2014, the net gain that you otherwise must include in your income is reduced (but not below zero) by $680,000.

Exceptions. The mark-to-market tax does not apply to the following.

  1. Eligible deferred compensation items.
  2. Ineligible deferred compensation items.
  3. Specified tax deferred accounts.
  4. Interests in nongrantor trusts.

Instead, items (1) and (4) are subject to withholding at source. In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. In the case of item (3), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. See paragraphs (d), (e), and (f) of section 877A for more information.

                                                    

Deferral of the Payment of Mark-to-Market tax.

You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property. If you make this election, the following rules apply.

  1. You make the election on a property-by-property basis.
  2. The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.
  3. Interest is charged for the period the tax is deferred.
  4. The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. a. The due date of the return required for the year of death. b. The time that the security provided for the property fails to be adequate. See item (6) below. 5. You make the election in Part IV, Section C.
  5. You must provide adequate security (such as a bond).
  6. You must make an irrevocable waiver of any right under any treaty of the United States that would preclude assessment or collection of any tax imposed by section 877A.

                                                    

When To File

If you expatriated after June 16, 2008, attach Form 8854 to your income tax return (Form 1040 or Form 1040NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions). Also send a copy of your Form 8854, marked “Copy,” to the address under Where To File, later. If you are not required to file Form 1040NR or Form 1040, send your Form 8854 to the address under Where To File, later, by the date your Form 1040NR (or Form 1040) would have been due (including extensions) if you had been required to file. (See Resident Alien or Nonresident Alien in the Instructions for Form 1040NR.)

Note. If you elected to defer the payment of any tax due, see Section C—Deferral of Tax , later. If you make this election, you must file Form 8854 annually for each year up to and including the year in which the full amount of deferred tax and interest is paid. For each year that you are required to file a Form 1040NR (or Form 1040), attach your annual Form 8854 to your Form 1040NR (or Form 1040) and send a copy, marked “Copy,” to the address under Where To File, later.

For each year that you are not required to file Form 1040NR (or Form 1040), send your Form 8854 to the address under Where To File, later, by the date your Form 1040NR (or Form 1040) would have been due (including extensions) if you had been required to file a Form 1040NR (or Form 1040).

                                                    

Where To File

  1. Send your original initial or annual Form 8854 to the address listed below.
  2. If you are required to attach the original Form 8854 to a Form 1040NR or a Form1040, send a copy of your initial or annual Form 8854, marked “Copy,” to the address listed below.
  3. If you elected to defer the payment of any tax due, see the instructions under Part IV, Section C, Line 15, later, on where to send your tax deferral agreement request.

                                                         

Penalties for non-compliance

If you are subject to section 877 or section 877A and required to file Form 8854 for any tax year, and you fail to file or do not include all the information required by the form or the form includes incorrect information, you will owe a penalty of $10,000 for that year, unless it is shown that such failure is due to reasonable cause and not willful neglect.

                                                    

Reasonable Cause Exception

If you fail to comply with US tax law and failed to properly file certain international tax forms such as the FBAR, 8938, 5471, 3520, 8854, etc. or other forms the is hope. The Internal Revenue Service understands that many people will not file the necessary international tax forms did not do so simply because they were unaware of the requirement. In other words, there’s no reason why these individuals should be penalized simply for not knowing about a certain filing requirements.

*Submitting under the Reasonable Cause Exception instead of one of the approved programs can be risky And you should speak with an experienced international tax attorney before making any affirmative statement to the IRS.

                                                    

Although the expatriate tax can seem very overwhelming, there are various different exceptions to the rule that requires payment of the Expatriate or “Expat Tax.” Just because you relinquished your legal permanent residency status or renounce your citizenship does not necessarily mean that you will be required to pay any additional tax the United States.

It is important that if you have recently expatriated or considering do so they speak with an experienced international tax lawyer.

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