How IRS Form 8833 is an Expatriate Tax Trap
Form 8833 Expatriation Tax Trap: The United States has entered into income tax and estate tax treaties with more than 50 countries. When a U.S. Person wants to rely on a treaty position involving taxes, they will file a Form 8833 — unless an 8833 form exception applies and the form is not required.
There are many reasons to take a treaty position.
One reason U.S. persons take a treaty position is to seek being treated as a foreign resident for U.S. tax purposes.
But, when it comes to expatriation there is a Form 8833 Expatriation Tax Trap to be aware of.
Purpose of IRS Form 8833
There are several purposes of the form, but when it comes to dual-residents (not “dual-citizens” per se), the form provides the following:
The form must also be used by dual-resident taxpayers (defined later) to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7.
A separate form is required annually for each treaty-based return position taken by the taxpayer, although a taxpayer may treat payments or income items of the same type received from the same payor as a single item for reporting purposes.
Regulations section 301.7701(b)-7
“(a) Consistency requirement
The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner.
A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws.
If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.”
Expatriation from the U.S is the process of relinquishing U.S. Citizenship or Lawful Permanent Resident Status. Some expatriates, who are considered covered expatriates may become subject to an exit tax and complete a Form 8854.
Two categories of filers may fall into the covered expatriate category:
- U.S. Citizens
- Legal Permanent Residents (8 of the last 15 years)
While a U.S. citizen will always have to conduct the covered expatriate analyses, only LONG-TERM PERMANENT Residents can qualify.
8 of the last 15 Years
To avoid the covered expatriate conundrum, an LPR can avoid LTR status by not meeting the definition of long-term. And, any year you claims foreign residence under a treaty can help eliminate that year as counting towards the 8 of 15 years.
Exception to Green Card Status
“You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.”
Here is the Kicker
If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be treated as having expatriated as of that date.”
Form 8833 Termination of U.S. Residency
When a person claims they are a non-resident, they enjoy certain tax benefits, but, if you terminate U.S. residency once you are an LTR, you have triggered the 877A tax rules.
As provided by Form 8833:
“Termination of U.S. Residency If you are a dual-resident taxpayer and a long-term resident (LTR) and you are filing this form to be treated as a resident of a foreign country for purposes of claiming benefits under an applicable U.S. income tax treaty, you will be deemed to have terminated your U.S. residency status for federal income tax purposes.
Because you are terminating your U.S. residency status, you may be subject to tax under section 877A and you must file Form 8854, Initial and Annual Expatriation Statement.
You are an LTR 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 status as an LTR ends. For additional information, see the Instructions for Form 8854, Initial and Annual Expatriation Statement, and Pub. 519, U.S. Tax Guide for Aliens.”
Why is this important?
Because you cannot go back and initiate “exit tax planning” after you have expatriated. If you go ahead and claim treaty benefits after you are considered an LTR, then you are deemed to have expatriated on that day.
This could cause a serious financial burden, especially in light of:
- Exchange Rates
- Deemed Distributions for ineligible pensions and tax deferred accounts.
- Notifying U.S. Eligible Retirement Plans
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