U.S. Expatriation Tax – Green Card Holders | Long-Term U.S. Residents
- 0.1 Expatriation Tax
- 0.2 What is the purpose of the Expatriation Tax?
- 0.3 Is the Expatriation Tax fair?
- 0.4 The IRS does not Care if it is Fair…
- 0.5 Are you a Long-Term Resident?
- 0.6 What does it mean to be a “Covered Expatriate”
- 0.7 Am I a Covered Expatriate?
- 0.8 How does Expatriation Work?
- 0.9 Penalties
- 0.10 Significant penalty imposed for not filing Expatriation Form
- 0.11 Preparing to Expatriate
- 0.12 Offshore Compliance
- 0.13 Basics of Offshore Reporting
- 0.14 Who Has to Report?
- 1 The Basics
U.S. Expatriation Tax – Green Card Holders | Long-Term U.S. Residents
Expatriation Tax can be daunting aspect of U.S. and International Tax Law. If you are a Green-Card Holder and planning on giving up your green card, then it is crucial that you understand the IRS tax ramifications.
Depending on the facts and circumstances of your situation, you may be subject to a very high “Expatriation Tax.”
Technically, the term is called “Expatriation Tax” and it is generally reserved for U.S. Citizens and Long-Term Green Card Holders, who meet the definition of a “Covered Expatriate.”
While most people believe that this “Tax” (Read: Penalty) only relates to U.S. citizens who renounce their citizenship, that assumption is incorrect. Rather, once a Legal Permanent Resident is considered to be a Long-Term Permanent Resident, they become subject to the expatriate tax just, as if they were U.S. Citizens.
What is the purpose of the Expatriation Tax?
The main purpose behind Expatriation Tax is to ensure individuals who have accumulated significant amount of assets or money while they were residents in the United States and/or were considered high income earners cannot simply relinquish their green card and leave to the United States — in order to avoid all taxation.
Here is an example of what the Expatriation Tax seeks to avoid:
Ernesto moved from Portugal to the United States nearly 15 years ago. While he resided in the United States, Ernesto obtained his Master’s Degree, as well as earned a nice six-figure salary.
Moreover, Ernesto invested in various stocks and securities, which have grown significantly over the 15-year period. To date, Ernesto’s value is upwards of $5 million.
If Ernesto simply packed up, moved overseas, and relinquished his green card, he would no longer be subject to US tax; (technicalities permitting) he would be considered a foreign person.
Why is this important? Because as a foreign person who is selling U.S. capital gains, he may be able to avoid all US tax. That is because depending on various tax treaties and general passive investment tax laws, the United States does not tax all forms of US income when it is held by a foreign person — and generally, U.S. Capital Gains are exempt from Tax.
Sure, while Ernesto was a Legal Permanent Resident/Green-Card Holder he was considered a US person and subject to tax on U.S . Capital Gains. But simply owning U.S. stocks and securities (which are increasing in value but have never been sold) does not amount to a taxable event; in other words there is no tax realized during the growth of the investment.
The IRS wants to prevent people from coming to the United States, earning significant amounts of money, and then when it’s time to pay U.S. tax on those earnings to relinquish their green card-and not be subject to tax.
Is the Expatriation Tax fair?
There are two schools of thought: The first school of thought is that the gain was realized while Ernesto was residing in the United States. Depending on which country he was from, there may be some foreign tax liability to his country of residence during the time the stocks are growing, but since Ernesto was residing in United States, he did not have to pay any U.S. tax on the gains until the stock is sold. Thus, it is not “fair” that he can leave without paying any tax.
Conversely, simply because Ernesto came to the United States and was a successful and astute investor, does not mean he should still be subject to the IRS tax once he relinquishes his green card.
Why? Because he no longer resides in the United States and is no longer US person enjoying the benefits of being a “U.S. Person.” Thus, since he is not deriving those benefits at the time he sells the stock, is it really fair for him to be taxed on gain he never even realized (remember, under the Expatriate Tax he is not really selling the stock) solely because he is relinquishing his green card?
The IRS does not Care if it is Fair…
If you have ever dealt with the Internal Revenue Service, then you are aware that simply being fair is not a part of the US Tax Plan and these tax laws can get as creative as a Dr. Seuss tale.
Therefore, if Ernesto is considered to be a covered expatriate, then he is going to have to pay a significant tax based on the value of the stock’s gain on the day before the expatriates.
Are you a Long-Term Resident?
The most important first step a former (or soon to be former) Green-Card Holder must determine is whether they are actually a long-term resident . If not, then the Expatriate rules do not apply (unless of course he or she was a U.S. Citizen).
A long-term resident is a green card holder who has been in the United States for at least eight (8) of the last 15 years. The rule does not mean the resident has to be in the United States for a straight eight years. Rather, if the Resident resides in the United States intermittently for at least eight (8) years over the last 15 years than unless other exemptions apply (foreign treaties, students, dual citizens, minors) he or she will most likely be considered a long-term permanent resident.
What does it mean to be a “Covered Expatriate”
The next important step in determining whether a person is subject to the expatriation tax determined whether they are a covered expatriate. Not all Long-Term Legal Permanent Residents are considered to be covered expatriates. Rather, it will depend largely on the amount of income a person earned and/or the value of their assets.
The IRS publishes certain minimal annual income requirements which the Long-Term Resident must meet in order to qualify as a covered expatriate. Since it is 2016, we will focus on the portion that involves expatriation on or after June 17, 2008 (the most recent law), as follows:
Am I a Covered Expatriate?
The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their U.S. resident status for federal tax purposes. Different rules apply according to the date upon which you expatriated.
Expatriation on or after June 17, 2008: If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
– Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015).
– Your net worth is $2 million or more on the date of your expatriation or termination of residency.
– You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
How does Expatriation Work?
IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code. 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, except that the wash sale rules of IRC 1091 do not apply.
The amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”). For calendar year 2014, the exclusion amount is $680,000. For other years, refer to the Instructions for Form 8854.
The amount of any gain or loss subsequently realized (i.e., pursuant to the disposition of the property) will be adjusted for gain and loss taken into account under the IRC 877A mark-to-market regime, without regard to the exclusion amount. A taxpayer may elect to defer payment of tax attributable to property deemed sold.
For more detailed information regarding the IRC 877A mark-to-market regime, refer to Notice 2009-85.
The IRS generally likes to penalize individuals do not meet tax compliance requirements. More over, the iris really likes to penalize individuals especially when the noncompliance involves international and foreign, offshore income and offshore tax compliance issues.
As provided by the IRS:
Significant penalty imposed for not filing Expatriation Form
The Internal Revenue Service reminds practitioners that anyone who has expatriated or terminated his U.S. residency status must file Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions. Form 8854 must also be filed to comply with the annual information reporting requirements of IRC 6039G, if the person is subject to the alternative expatriation tax under IRC 877 or IRC 877A. A $10,000 penalty may be imposed for failure to file Form 8854 when required.
IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate.
The Instructions for Form 8854 provide details about the filing requirements, related definitions and line-by-line instructions for completing the form. Failure to file or not including all the information required by the form or including incorrect information could lead to a penalty.
Preparing to Expatriate
If you are preparing to relinquish you green card, it is very important to speak with an experienced international tax lawyer to assess and evaluate your financial situation and determine whether you are a Long-Term Legal Permanent Resident, and if you are – whether or not you meet the threshold requirements for being a covered expatriate.
There may be some alternatives, exceptions and exclusions involving getting into compliance with respect to expatriation.
In addition to the expatriation, there is an equally important issue involving whether or not you have been in compliance with offshore and foreign accounts, income and assets at the time your expatriate.
Why? Because if you are not in compliance (FBAR, 8938, Schedule B, 5471, 8621, 3520, 3520-A, etc.), but you wrongfully affirm that you have properly filed all of the proper foreign tax documents in accordance with form 8854, you may be opening yourself up to a whole host of new penalties and fines which you never contemplated prior.
Call now; we can help.
The following is a brief summary of general Offshore Reporting requirements:
Basics of Offshore Reporting
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
Please do not worry. We can assist you as we have assisted clients nationwide and in over 55 countries disclose upwards of $40 million in a single disclosure.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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