US Citizens Living in Australia and Renouncing Citizenship
When a US Citizen is a dual-citizen of the United States and Australia, or a dual-citizen of the United States and a different country but residing in Australia as a permanent resident, they may want to consider renouncing their US citizenship. That is because unlike most other countries in the world, the United States taxes citizens on their worldwide income. It does not matter whether or not the US citizen resides in the United States or abroad and it does not matter if the income is sourced in the United States or sourced from an overseas country. This may lead US taxpayers to want to (understandably) escape the clutches of the IRS. For US citizens considering renouncing their US citizenship and residing in Australia, here are five important facts to know –
Five Years of Tax Compliance
One of the first important issues to consider is whether or not the filer is considered tax compliant for the past five years. Whether or not the taxpayer meets the net-worth test or the net income average tax liability test to be considered a covered expatriate – – the US citizen will be considered a covered expatriate if they submit their expatriation paperwork to the IRS and they cannot truthfully certify under penalty of perjury that they have been tax compliant for the past five years.
Form 8854 is Required
When it comes time to expatriation, the taxpayer has several forms they will have to file with the US government. For the immigration expatriation portion, they will have to file various Department of State (DS) forms. For IRS tax purposes, they will have to file a Form 8854 as well as a dual-status tax return in their final year of citizenship.
Exit Tax Implications
While the exit tax for expatriates can be very complicated, there is unfortunately there is a significant amount of incorrect information on the internet about the expatriation process. It is not a wealth tax per se, and therefore there are many citizens who may have a net worth that far exceeds $2 million — but will not have any exit tax.
Superannuation as Ineligible Deferred Compensation
One of the biggest headaches when it comes to expatriation for Australians is the tax treatment of Superannuation. That is because the superannuation is generally considered to be ineligible deferred compensation, as opposed to a 401(k) for example — which is considered a type of eligible deferred compensation. With ineligible deferred compensation, the value is grossed up at the time of expatriation and taxed, even though that income and not be taxable in Australia and even though the income has not been distributed to the taxpayer. There are certain rules that may minimize the tax such as the step-up basis exceptions.
More than Just Mark-to-Market
When a person is considered a covered expatriate — and therefore may become subject to exit tax — the majority of the information they will find online involves mark-to-market –– but this is just the tip of the iceberg. Unfortunately, they may be significant exit tax on other non-mark-to-market assets as well, such as ineligible deferred compensation and specified tax-deferred accounts. Since it is very difficult if not impossible to unwind the expatriating act, taxpayers should be sure to consider the ramifications before undergoing a formal expatriation process.
Interested in Expatriation from the U.S.?
Our firm specializes exclusively in international tax and offshore disclosure.
Contact our firm today for assistance.