The IRS Form 8854 is required for U.S. citizen and certain legal permanent residents who are “long-term residents.” The form is filed when the Taxpayer files their tax return for the year they expatriated.
If the taxpayer is also a covered expatriate, there may exit tax consequences. While the net worth and net income tax value are the two main tests, there is a 3rd test (5-year certification of tax compliance). For many residents, they were unaware green card holders they even had these income and reporting requirements — never mind that now they may be considered “covered” and have to pay an exit tax.
And, with the U.S. taking an aggressive position on matters involving foreign accounts compliance, a person may become a covered expatriate without even realizing it. When a person is non-compliant, they can usually (and safely) get into compliance with voluntary disclosure.
8854 Instructions on How to Complete the Form
In November 2019, the IRS recent updated the Form 8854 and Form 8854 Instructions. When it comes to the Form 8854 & instructions, the IRS has been less than clear in detailing the rules and requirements. For additional assistance and clarification, the IRS has also published Notice 2009-85.
When a person either relinquishes their U.S. citizenship or green card they have to conduct a Form 8854 analysis. Here are some frequently asked questions we receive about Form 8854 and the instructions:
Who Has to File?
For U.S. citizens, it does not come as much of a surprise that there may be an exit tax for renouncing your citizenship, but it often comes as a surprise to a green card holder (aka Legal Permanent Resident) who is not even considered a U.S. citizen.
From their perspective (understandably so) they are just giving back their green card, so why would they have to follow that up with a complicated and many times unnecessary exit tax form 8854 filing?
Oftentimes the assets were acquired with money that was earned or generated from money earned before becoming a Legal Permanent Resident.
Here is a summary of the filing instructions for Form 8854:
Are You a U.S. Citizen or Long Term Resident?
Expatriation tax provisions apply to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated).
Form 8854 is used by individuals who have expatriated on or after June 4, 2004.
Does it Apply to U.S. Citizens?
Yes. The following is a breakdown of when a U.S. Citizen is considered to have expatriated.:
U.S. Citizen – Day of Relinquishment of Citizenship
You are considered to have relinquished your U.S. citizenship on the earliest of the following dates:
– The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).
– The date you furnished to the State Department a signed statement of your voluntary relinquishment of a U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).
– The date the State Department issued a certificate of loss of nationality.
– The date a U.S. court canceled your certificate of naturalization.
Are All Legal Permanent Residents Required to File a Form 8854?
In order to be required to file this form, the person must be considered a long-term permanent resident, or stated another way – the person is a Legal Permanent Resident, who is a “Long-Term Resident”
Long-Term Resident (LTR)
You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends. In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.A=
What is a Lawful Permanent Resident
You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant.
What if I resided outside of the U.S?
Simply residing outside of the U.S. is no enough to relinquish your Green Card. Rather, you still retain your Green Card Status until you formally abandon the Green Card (actually or constructively).
You generally remain a Legal Permanent Resident if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t commenced to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country.
You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.
If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be treated as having expatriated as of that date.
Date of Termination of Long-Term Residency
If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.
– The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.
– The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).
– The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.
– If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment on a Form 8833 attached to a timely filed income tax return. See Regulations section 301.7701(b)-7 for information on other filing requirements if you are such an individual.
Date of Expatriation
Date of Tax Expatriation For purposes of filling out Part I, the date of your expatriation is the later of the date you notified the relevant agency of your expatriating act or the date Form 8854 was first filed in accordance with these instructions. Apply the rules of section 7502 to determine the date on which this form is filed. Generally, the postmark date is the filing date
Will I Be Taxed Under IRC Section 877
There are three main situations which may result in Exit Tax Liability:
You are subject to taxation under section 877 if, within the 10-year period immediately preceding 2017, you lost your U.S. citizenship or you were an LTR who ceased to be a lawful permanent resident and any one of the following applies to you:
– Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation is more than the amount listed by the IRS for the respective year:
- $139,000 for 2008
- $145,000 for 2009
- $145,000 for 2010
- $147,000 for 2011
- $151,000 for 2012
- $155,000 for 2013
- $157,000 for 2014
- $160,000 for 2015
- $161,000 for 2016
- $162,000 for 2017
Your net worth is $2 million or more on the date of your expatriation.
You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.
Exemptions to Filing the 8854 Form
You can 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, as of the expatriation date, 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.
You can 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 occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
Exit Taxation under Section 877A – A Summary
The following is provided in the instructions of Form 8854, but we will provide an additional summary for you to provide a bit of clarity:
How is the Tax Calculated?
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”).
Does It Apply to All Property?
No. This applies to most types of property interests you held on the date of your expatriation. But see Exceptions, later.
Gains vs. Losses
The IRS will try to tax you on all Gain, while limiting your losses. As provided by the IRS: 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) doesn’t apply.
There are some exceptions to the general mark-to-market rules.
The Mark-to-Market tax does not apply to the following
- Eligible deferred compensation items.
- Ineligible deferred compensation items.
- Specified tax deferred accounts.
- Interests in nongrantor trusts.
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:
- You make the election on a property-by-property basis.
- The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.
- Interest is charged for the period the tax is deferred.
- The due date for the payment of the deferred tax cannot be extended beyond certain dates.
Are you Considering Expatriation?
If you are considering expatriation, and you’re either a US citizen or Long-Term Permanent Resident, that it is important to understand the exit tax implications.
Just as important, is that because the submission of form 8854 typically ignites a more in-depth review of your prior tax history and filings, it is important that you are in compliance prior to submitting the form.
Oftentimes, we will prepare both in offshore compliance package along with a form 8854 to make sure you are in compliance at the time you are expatriating.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.