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The Tax Issues of Expatriation
The “United States Permanent Resident Card”, also known as a Green Card, as a work and residence permit for the USA of unlimited duration and as an immigration visa, constitutes an admission ticket to the USA. However, possession of a Green Card confers more obligations than just benefits on its holder.
Many clients with Green Cards have asked us whether expatriation is a viable solution to getting out of the onerous US tax system. Unfortunately, US tax law prevents US taxpayers avoiding US tax liability by renouncing their US citizenship or by relinquishing their Green Card. The relevant US tax (known as “expatriation tax”) relates to individuals who renounce their US citizenship and also to certain long term Green Card holders. You are a long term Green Card holder 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 residency ends. In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits.
Whether the expatriation tax applies will depend on the satisfaction of at least one of the following three conditions:
- Where the relinquishment of the Green Card occurred in 2010, the average assessed US taxes for the five years prior to the relinquishment of the Green Card must amount to more than $145,000. This amount is adjusted on an annual basis.
- The worldwide assets of the taxpayer are assessed for the purposes of the application of the “US expatriation tax” rules. The criteria will have been met where the value of the worldwide assets exceeds $2,000,000 at the date of the relinquishment of the Green Card.
- The taxpayer must show that he or she has complied with his or her obligations in respect of US taxation (for example, the submission of US tax returns) during the five years prior to the relinquishment of the Green Card.
The expatriation rules apply to you if you meet any of the following conditions.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than:
- $139,000 if you expatriated or terminated residency in 2008.
- $145,000 if you expatriated or terminated residency in 2009 or 2010.
- $147,000 if you expatriated or terminated residency in 2011.
- $151,000 if you expatriated or terminated residency in 2012.
- $155,000 if you expatriated or terminated residency in 2013.
- $157,000 if you expatriated or terminated residency in 2014.
- 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.
- You expatriated before 2014 and you:
- Deferred the payment of tax,
- Have an item of eligible deferred compensation, or
- Have an interest in a nongrantor trust.
Exception for dual-citizens and certain minors. Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. However, they still must provide the certification required in (3) above.
Certain dual-citizens. You may qualify for the exception described above if both of the following apply.
- You became at birth a U.S. citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country.
- You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1.
Certain minors. You may qualify for the exception described earlier if you meet both of the following requirements.
- You expatriated before you were 18½.
- You have been 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.
Expatriation date. Your expatriation date is the date you relinquish U.S. citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U.S. resident).
Former U.S. citizen. You are considered to have relinquished your U.S. citizenship on the earliest of the following dates.
- The date you renounced 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 voluntary relinquishment of 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 that a U.S. court canceled your certificate of naturalization.
Former long-term resident. You are considered to have terminated your long-term residency on the earliest of the following dates.
- The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status.
- The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order.
- 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 began 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 notify the IRS of that treatment on Forms 8833 and 8854. See Effect of Tax Treaties in chapter 1 for more information about dual residents.
How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008)
In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) 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”). This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. But see Exceptions , later.
Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U.S. internal revenue laws. Losses from deemed sales must be taken into account to the extent otherwise provided under U.S. internal revenue laws. However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. The net gain that you otherwise must include in your income is reduced (but not below zero) by:
- $600,000 if you expatriated or terminated residency before January 1, 2009.
- $626,000 if you expatriated or terminated residency in 2009.
- $627,000 if you expatriated or terminated residency in 2010.
- $636,000 if you expatriated or terminated residency in 2011.
- $651,000 if you expatriated or terminated residency in 2012.
- $668,000 if you expatriated or terminated residency in 2013.
- $680,000 if you expatriated or terminated residency in 2014.
Exceptions. The mark-to-market tax does not apply to the following.
- Eligible deferred compensation items.
- Ineligible deferred compensation items.
- Interests in nongrantor trusts.
- Specified tax deferred accounts.
Instead, items (1) and (3) may be subject to withholding at source. In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. See paragraphs (d), (e), and (f) of section 877A for more information.
Expatriation Tax Return
If you expatriated or terminated your U.S. residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms.
Deferral of payment of mark-to-market tax. You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. If you make this election, the following rules apply.
- You can make the election on a property-by-property basis.
- The deferred tax attributable to 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 the earlier of the following dates.
- The due date of the return required for the year of death.
- The time that the security provided for the property fails to be adequate. See item (6) below.
- You make the election on Form 8854.
- You must provide adequate security (such as a bond).
- You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax.
Patel Law Offices has consulted with hundreds of clients regarding their offshore asset compliance issues and expatriation. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.