Expatriation, What is it?
What is Expatriation for Citizen & Long-Term Residents? Expatriation is a simple, but complex undertaking. It is the process of giving up or “relinquishing” U.S. status. For example, when a person is a Visa Holder — and only subject to U.S. tax and reporting because they met the substantial presence test, they can avoid U.S. status simply by not meeting the Substantial Presence Test. But, when a person has a more “permanent” U.S. status, such as a U.S. Citizens and certain Legal Permanent Residents and they want to give-up their U.S. status — it is referred to as expatriation. Becoming an expatriate requires certain USCIS and IRS tasks to be completed before the IRS lets you go. Oftentimes, when discussing the concept of expatriation and the IRS, there are very specific issues which need to be addressed, such as Long-Term Resident status, Covered Expatriate status, and Mark-to-Market elections. For purposes of this summary, we will introduce the basics of the process of expatriation, and which U.S. Citizens and Legal Permanent Residents who are “long-term residents” may be subject to exit tax.
Who is Subject to Expatriation?
Generally, expatriation is limited to U.S. Citizens and Legal Permanent (Long-Term) Residents.
Planning for Expatriation
When a person is a U.S. citizen or Legal Permanent Resident, they should set their plan of expatriation in motion before they actually expatriate.
That is because once a person expatriates, the expatriating event is complete, and the covered expatriate analysis kicks in — without the opportunity to perform any “exit tax planning.”
How to Relinquish U.S. Status
There are various ways to relinquish U.S. Status.
The two simplest ways is for a Green Card Holder to file a Form I-407 (Voluntary Abandonment) or a U.S. Citizen to relinquish their Citizenship at the local consulate of the country they reside.
Once the process is complete, they will receive a certificate of loss of nationality.
*There are tax traps for LTRs who file 8833 after being an LPR for eight years (see below).
Who May be a Covered Expatriate?
There are really only two main categories of U.S. individuals who may even qualify as a Covered Expatriate.
Either a U.S. Citizen, or Legal Permanent Resident (LPR) who is a Long-Term Resident (LTR). An LTR is someone who has been an LPR for eight of the last 15-years.
What Happens to U.S. Citizens and LTRs?
When a Person is a U.S. Citizen or Long-Term Resident, they have to complete the Covered Expatriate analysis.
There are (3) three-ways to become a covered expatriate:
- Meet the “Net-Worth” Test; or
- Meet the “Net Income Tax Liability” Test; or
- Unable to Certify Tax Compliance for the past 5 years.
Do Covered Expatriates Pay Exit Tax?
Not always, and there are many complex rules to this analysis.
Presuming that a person meets the Covered Expatriate Test, they then have to prepare the Form 8854 balance sheet involving the Mark-to-Market sale on unrealized gain.
For example, if Daniel wants to expatriate and is a covered expatriate, he must determine the basis of his properties and assets, along with the market values, and treat them as sold the day before expatriation. Some assets may be deemed distributed (ineligible deferred compensation plans), some items may be deferred (eligible deferred compensation plans) and other items may be excluded.
Moreover, the basis on some property held before the person became a U.S. Person may increase (step-up rules), and once the analysis is complete, an exclusion amount is applied to offset potential tax liability.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore compliance and expatriation.
Contact our firm today for assistance with getting compliant.