US Exit Tax & Giving Up a Green Card
Giving Up a Green Card & US Exit Tax: When a US person gives up their green card, it can be a very complicated ordeal from an IRS tax perspective. From an immigration perspective, it is relatively straightforward — the person (usually) files a Form I-407 by mail and waits for approval. Generally, it takes a few months to hear back. Before 2019, Green Card Holders could actually go into the local consulate overseas and submit the form — but that is no longer the case. Unlike the immigration aspect of relinquishing a green card, the tax consequences can be somewhat devastating — depending on the facts and circumstances surrounding the relinquishment.
For reference, not all green card holders can even be subject to US exit tax — it only applies to covered expatriates. And, even if someone is a covered expatriate and subject to US exit tax, it does not mean they will actually owe any exit tax — although subsequent gift tax and 401(k) distribution issues may follow the covered expatriates in future years. Let’s review three (3) of the most basic IRC code sections and Forms you will come across what is time to relinquish:
IRC 877 Expatriation to Avoid Tax
The purpose of IRC 877 is to define who may be subject to exit tax at the time of expatriation. The code section is broken down by first identifying the basics of the purpose of the code section — followed by definitions of which individuals may be subject to exit tax. These individuals are referred to as covered expatriates. The two main categories of potential covered expatriates includes US citizens and long-term residents (a long term resident is a permanent resident who has been a permanent resident for at least eight of the last 15 years). The code section also provides certain exceptions and limitations for certain minors and dual citizens.
IRC 877A Tax Responsibilities at Expatriation (US Exit Tax)
IRC 877A applies to situations in which a person is considered a covered expatriate and therefore has to deal with the imaginary mark-to-market/unrealized capital gains sale on the imaginary sale of certain assets — along with potential deemed distributions for certain tax-deferred accounts and ineligible deferred compensation. The code section explains how the calculation will work, along with certain exclusion amounts that are replied to be imaginary again which can be used to reduce any potential exit tax consequences. IRC 877A provides information about how certain items will be treated, and how the expatriate may be able to put up a bond or similar financial instrument to avoid the immediate exit tax consequences at expatriation.
Form 8854 Initial and Annual Expatriation Statement
When it comes time to expatriate, the expatriate will file a form 8854 in the year following the tax year they expatriate. For example, if a person expatriates into 2021, then they will file a form 8854 into 2022 when they file their 2021 tax return. Their expatriate tax return will be a dual-status return, which includes a 1040 and 1040-NR. One very important thing to remember is that form 8854 is not limited to covered expatriates and may be required in subsequent years (annual expatriation statement). If a person is a covered expatriate they will have to complete the form 8854 in a much more comprehensive fashion then if they are not considered a covered expatriate — but they are still required to file form. More specifically, the form is required by US citizens and Long-Term Residents. For reference, the 8854 form requires the taxpayer to provide specific information about their prior tax returns, net worth, and net income tax liability for the past five years preceding the year of expatriation. There are other specific questions as well regarding dual citizenship, and whether the taxpayer qualifies for any potential exceptions.
Get Your US Exit Tax Ducks in a Row, First
As we have mentioned several times on our website, it is very important to plan before expatriate. Once a person complete the expatriate act, they cannot go back and unwind it. Moreover, there are certain tax traps to be wary of including the form 8833 request to be treated as a foreign resident tax trap that may lead to an unintentional expatriation. If you are considering expatriation, you should speak with experienced counsel.
Golding & Golding: International Tax & Compliance
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and Expatriation rules.
Contact our firm today for assistance.