What is Expatriation?
What is Expatriation: Expatriation is the process of relinquishing or renouncing U.S. Person status. Oftentimes, when people think of the term expatriation, they immediately think of exit tax, and what happens if they have more than $2 million when they leave the US. Expatriation does not necessarily involve exit tax per se, and whether or not a person qualifies as a covered expatriate is not determined solely by their net worth. In fact, if an expatriate can utilize proper exit tax planning, they maybe able to avoid (or minimize) exit tax — although this is not always the case.
Let’s go through five (5) important things to know about expatriation.
Expatriation is not Just for U.S. Citizens
Common sense would dictate that only a U.S. citizen can renounce their US status.
And, while the phraseology is generally that a U.S. citizen will renounce their US citizenship at expatriation, an expatriate can be a permanent resident as well.
Specifically, when a legal permanent resident is considered a long-term resident — which means they have maintained the legal permanent resident status for at least eight of the last 15 years — they are considered a long-term resident and subject to the covered expatriate analysis.
*It is important to note that the test is whether a person has been a legal permanent resident for eight of the last 15 years and not whether the person actually resided in the U.S. for eight of the last 15 years.
** Just letting a green card expire is not a sufficient act of expatriation.
Are You a Covered Expatriate?
Even when a person is a US citizen or long term resident, they will not be subject to any possible exit tax unless they are also a covered expatriate.
And, even if they meet the covered expatriate test, they may still qualify for one of the covered expatriate exceptions.
In order to be considered a covered expatriate, the expatriate must meet one of the three tests below:
- Net income tax liability
- Net worth
- Unable to certify tax compliance for five prior years.
Exit Tax: Mark-to-Market & Deemed Distribution
Just because a person is considered a covered expatriate, does not mean they will owe exit tax.
Rather, the person much then evaluate their assets to determine which assets are subject to the mark-to-mark analysis on the unrealized capital, and which assets are possibly subject to the deemed distribution rules.
For example, while tax-deferred investments and ineligible deferred compensation are typically subject to the deemed distribution rules based on the value the day before expatriation, eligible deferred compensation such as a 401(k) is not subject to deemed distribution — although treaty benefits are a irrevocably waived and later taxed at 30%.
Form I-407 vs. DS-4079-4083
Depending on whether a person is a long term resident or a US citizen will determine how they will complete the expatriating act.
For a Green Card Holder, it is relatively simple, and they can submit the form I-407 as the expatriating act.
For US citizens, it generally requires attending an interview at an embassy/consulate outside of United States, undertaking an exit interview, preparing forms DS 4079, 4080, 4081, 4082, and 4083 (certificate of loss of nationality), submitting payment, and receiving back a certificate of loss of nationality.
Covered Expatriate Post Expatriation
Ideally, it is best for the expatriate to avoid covered expatriate status.
That is because even after a covered expatriate leaves the United States, there are issues to contend with, such as annual form 8854 filings and gift tax consequences for gifts from covered expatriates to U.S. persons (resulting in an immediate tax liability to the US person).
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore compliance and disclosure and expatriation.
Contact our firm today for assistance.