Expatriation Help Guide
Expatriation Help Guide for Green Card Holders & US Citizens: When a Green Card Holder (Long-Term Resident) or US Citizen want to expatriate from the U.S., they must follow the proper steps for expatriation. These protocols will include both tax and immigration requirements. The IRS, requires U.S. Citizens and Long-Term Residents to file a Form 8854 and assess, Covered Expatriate status.
Adding to the complexity of expatriation are requirements such as making a Mark-to-Market election on certain unrealized capital gain, and determining tax liability for certain deemed distributions.
We will introduce the basic concepts involving expatriation, and who may be covered.
Expatriation from The U.S. – What is it?
When a person expatriates from the U.S., they relinquish their U.S. status. The concept of expatriation (and filing requirements) impact Long-Term Residents and U.S. Citizens. A Long-Term Resident (LTR), is a Permanent Resident (PR) who has held the status for eight of the last 15 years.
For example, when a person is a Visa Holder and subject to U.S. tax and reporting simply because they met the substantial presence test, they can avoid U.S. status simply by not meeting the Substantial Presence Test.
But, when a person has a more “permanent” U.S. status, such as a U.S. Citizens and certain Legal Permanent Residents, when they want to give-up their U.S. status, it is a form of expatriation that has certain requirements for completion.
What is a Covered Expatriate?
There are really only two main categories of U.S. individuals who may even qualify as a Covered Expatriate.
Either a U.S. Citizen, or Legal Permanent Resident (LPR) who is a Long-Term Resident (LTR). An LTR is someone who has been an LPR for eight of the last 15-years.
Expatriation Tax Planning is Important
While there is generally no look-back period, you also cannot go back and unwind the expatriating event. In other words, once a person expatriates, the expatriating event is complete, and the covered expatriate analysis kicks in — without the opportunity to perform any “exit tax planning.”
USCIS Form I-407 or Consulate Visit
The two simplest ways is for a Green Card Holder to file a Form I-407 (Voluntary Abandonment) or a U.S. Citizen to relinquish their Citizenship at the local consulate of the country they reside.
*There are tax traps for LTRs who file 8833 after being an LPR for eight years (see below)
Covered Expatriate Analysis
If a person is considered a Covered Expatriate, they may have to pay an exit tax at expatriation.
But, it important to remember:
- Not all LTRs and U.S. citizens are covered expatriates; and
- Not all Covered Expatriates will owe an Exit Tax
The three (3) Covered Expatriate tests include:
- Meet the “Net-Worth” Test; or
- Meet the “Net Income Tax Liability” Test; or
- Unable to Certify Tax Compliance for the past 5 years.
Is Exit Tax for Covered Expatriate Mandatory
Not all expatriates will have to pay an exit tax.
Presuming that a person meets the Covered Expatriate Test, they then have to prepare the Form 8854 balance sheet involving the Mark-to-Market sale on unrealized gain.
For example, if Daniel wants to expatriate and is a covered expatriate, he must determine the basis of his properties and assets, along with the market values, and treat them as sold the day before expatriation.
There are many complex rules to this analysis.
For example, some items may be deemed distributed (ineligible deferred compensation plans), some items may be deferred (eligible deferred compensation plans) and other items may have be excluded.
Moreover, the basis on some property held before the person became a U.S. Person may increase (step-up rules), and once the analysis is complete, an exclusion amount is applied to offset potential tax liability.
Interested in Expatriation from the U.S.?
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