Tax Mistakes To Avoid when Expatriating
Tax Mistakes To Avoid when Expatriating: When a US Citizen or Long-Term Lawful Permanent Resident (aka Expatriate) decides they are going to formally expatriate from the United States, the tax considerations and implications oftentimes take a backseat to the relocation process. Sometimes, mistakes at the outset can cause significant tax consequences to the expatriate. And, since the expatriating act such as renouncing citizenship or relinquishing Lawful Permanent Resident status cannot be unwound — it is important for the expatriate to start on the right track from the get-go. While there are many tax implications to consider, but let’s focus on five common tax mistakes expatriate (understandably) make.
8-Years Lawful Long-Term Permanent Resident
This may be the biggest tax mistake to avoid. In order to be considered a Lawful Long-Term Permanent Resident (LTR), the person must have held their lawful permanent resident status for eight of the last 15 years — excluding any year a Form 8833 was filed to claim foreign-person status. It does not require eight full-years, but rather eight years — commencing with the year the taxpayer receives their Lawful Permanent Resident status — and terminating with the expatriating act. Some expatriates believe it requires eight (x) 365/366 days, but that is not the position the IRS takes — and it may result in the Taxpayer unintentionally becoming an LTR before they know it.
Form 8833 Tax Mistake
Sometimes, a Taxpayer wants to go back and amend prior year tax returns or begin filing the form 8833 going forward to stave off LTR status. The problem is that if the taxpayer files the form 8833 at any time after they are technically considered a long-term resident — then the actual filing of the Form 8833 is deemed as the expatriating act, which can result in a very big tax mistake and serious tax repercussions.
401K and IRA are Treated Differently
When a person has a 401(k), it is considered deferred compensation — unless mistakes are made — and will not be deemed distributed at the time of expatriation. This means the income is not grossed-up at the time of expatriation. Conversely, when a person has an IRA (excluding an employment IRA), it is considered a specified tax-deferred account and deemed distributed on the day before expatriation — the latter which means it is included as income on the Taxpayer’s Final tax return.
8854 is Not Only for Covered Expatriates
The term covered expatriate impacts Lawful Long-Term Permanent Residents and/or US Citizens who meet (or rather “fail”) one of the three tests to be considered a covered expatriate. Whether or not the expatriate is considered a covered expatriate does not determine if they have to file an IRS Form 8854 or not. Stated another way, US Citizens and Lawful Permanent Residents must file the Form 8854 in the year that expatriate (and possibly subsequent years) whether or not they are a covered expatriate.
Lingering US Income Leads to Common Tax Mistakes
Once the expatriate is no longer a US person, they are considered a nonresident alien. If the nonresident alien still generates US income (for example if they maintain a Schwab or Vanguard account in the United States), they may still be liable for US taxes on the US income. It is referred to as FDAP.
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