The (New) Form 8854 Reporting Requirements Explained 2023

Form 8854

Form 8854

Form 8854 Instructions: U.S. Citizens and Permanent Residents who are considered long-term residents file IRS Form 8854. The 8854 form is filed in the year after expatriation. For example, if a Long-Term Resident relinquishes citizenship in 2019, then in 2020 when he files his 2019 tax return, he includes the Form 8854. We have summarized the Form and instructions below. If you are a covered expatriate becomes more complex. In addition, if you are unable to certify you are 5-years compliant with taxes and offshore reporting, you should speak with a board-certified tax specialist first. That is because with the IRS increasing enforcement of offshore accounts and asset reporting – compliance is crucial to avoid offshore penalties, and possible covered expatriate status.

Form 8854 & Instructions (Permanent Residents & U.S. Citizens)

A common misconception is that Form 8854 is only required for U.S. citizens, but that is false. The form is required for U.S. citizens and legal permanent residents who qualify as long-term residents.

We will reproduce the Form 8854i instructions, and provide summaries for important aspects of the form.

What is Expatriation?

Expatriation includes the acts of relinquishing U.S. citizenship and terminating long-term residency.

Who Must File

The “who” must file, breaks down into two main categories:

• • • Initial expatriation statement; and

    • Annual expatriation statement

Initial Expatriation Statement

You must file your initial Form 8854 (Parts I and II) if you relinquished your U.S. citizenship in 2019 or you are a long-term resident (LTR), defined below, and terminated your residency status in 2019.

You must file your annual Form 8854 (Parts I and III) if you expatriated before 2019 and you:

1. 1. 1. Deferred the payment of tax,

      2. Have an item of eligible deferred compensation, or

      3. Have an interest in a nongrantor trust

Explanation of the “Who”

The three categories of people who must continue to file are as follows:

Deferred Payment of Tax

 If a person posted a bond to avoid the payment of expatriation tax, the annual form is required.

Have an Item of Eligible Deferred Compensation

When a person expatriates with a 401K as one of their assets —  the 401K is not subject to the Mark-to-Market tax at expatriation — and is not deemed distributed. Once the expatriates receive payments, they will be subject to 30% withholding (Treaty rules do not apply) — and the expatriate may continue having to file the annual 8854.

Have an Interest in a Nongrantor Trust

This is relatively straightforward; if you have an interest in one, you continue filing the form.

Date of relinquishment of U.S. Citizenship

You are considered to have relinquished your U.S. citizenship on the earliest of the following dates:

• • • The date you renounced your 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 your voluntary relinquishment of a 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 that the State Department issued a certificate of loss of nationality.

    • The date a U.S. court canceled your certificate of naturalization.

Long-Term Resident Defined

• • • 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.

    • In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.

    • Important: When a person is merely a visa holder or otherwise meets the substantial presence test, but did is NOT a Legal Permanent Resident, then they are not subject to U.S. expatriation rules.

Lawful Permanent Resident

• • • You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant.

    • You generally have this status if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t commenced to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country.

    • 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.

    • 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

Date of Termination of Long-Term Residency

Date of termination of long-term residency.

If you were an LTR, you terminated your lawful permanent residency (and consequently, have an expatriation date) on the earliest of the following dates.

Recap

If you are a U.S. Citizen or Long-Term Resident you must file Form 8854 in the year you expatriate.

Covered Expatriate

If you are a U.S. Citizen or Long-Term Resident, you must file Form 8854 BUT that does not mean you be deemed a covered expatriate and therefore subject to the Exit Tax.

Three Tests to Determine if you are a Covered Expatriate

You are a covered expatriate if you expatriated after June 16, 2008, and any of the following statements apply.

Net Income Tax Liability

Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.

1. 1. 1. $139,000 for 2008.

      2. $145,000 for 2009.

      3. $145,000 for 2010.

      4. $147,000 for 2011.

      5. $151,000 for 2012.

      6. $155,000 for 2013.

      7. $157,000 for 2014.

      8. $160,000 for 2015.

      9. $161,000 for 2016.

      10. $162,000 for 2017.

      11. $165,000 for 2018.

      12. $168,000 for 2019.

      13. $171,000 for 2020.

      14. $172,000 for 2021.

Net Worth Test

Your net worth was $2 million or more on the date of your expatriation.

Certification of 5-Years of Tax Returns

You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation

We have prepared additional resources to help you understand the covered expatriate rules.

Exception for Dual-Citizens and Certain Minors

Dual-citizens and certain minors (defined next) won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) above (under Covered expatriate) applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) (under Covered expatriate, earlier).

Certain Dual-Citizens

You can qualify for the exception described above if you meet both of the following requirements.

– You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.

– You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred.

 For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

Certain Minors

You can qualify for the exception described above if you meet both of the following requirements.

• • • You expatriated before you were 181/2.

    • You were a resident of the United States for not more than 10 tax years before the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519

Result

Even if an expatriate meets one of the three tests to be an expatriate, if they also meet one of the exceptions, they will avoid covered expatriate status.

Taxation Under Section 877A

If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value (FMV) 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 your expatriation. But see Exceptions, later. Gains from deemed sales are taken into account without regard to other U.S. internal revenue laws.

Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws.

However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn’t apply. For 2019, the net gain that you otherwise must include in your income is reduced (but not below zero) by $725,000.

Explanation

When you are a covered expatriate, you must then perform a calculation to determine you net unrealized gain. In other words, you subtract the adjusted basis A/B from the current FMV on the date before expatriation. The gain is then reduced up to $725,000, which means if your total gain is less than $725,000, you do not ow any tax for the MTM – subject to potential tax on deemed distributions for non MTM items (See next section)

Exceptions to Mark-to-Market Taxation Rules

The mark-to-market tax does not apply to the following:

1. 1. 1. Eligible Deferred Compensation Items.

      2. Ineligible Deferred Compensation Items.

      3. Specified Tax Deferred Accounts.

      4. Interests in Nongrantor Trusts.

Eligible Deferred Compensation

Instead, item (1)  such as a 401K is subject to withholding at source provided that you properly make an irrevocable waiver on your initial filing of this form of any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country and timely notify the payor on Form W-8CE.

• • • To timely notify the payor on Form W-8CE you must file the Form W-8CE with the payor on the earlier of:

      • The day prior to the first distribution on or after the expatriation date, or

      • 30 days after the expatriation date.

Interests in Nongrantor Trusts

Item (4)  is also subject to withholding at source, and you are treated as having waived any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country, unless you elect to be treated as having received the value of your entire interest in the trust by obtaining a ruling from the IRS to that effect. See Section C—Property Owned on Date of Expatriation under Part II.

Ineligible Deferred Compensation Items

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 and you should include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date.

Specified Tax Deferred Accounts

In the case of item (3), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date and you should include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date. See paragraphs (d), (e), and (f) of section 877A.

Deferral of the Payment of Mark-To-Market Tax

You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property.

If you make this election, the following rules apply.

• • • You make the election on a property-by-property basis.

    • The deferred tax on 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.

    • You make the election in Part II, Section D—Deferral of Tax.

    • 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 that would preclude assessment or collection of any tax imposed by section 877A.

U.S. Expatriation with Offshore Asset & Account Compliance

A very common situation in the past few years has been when a U.S. Citizen or Long-Term Resident wants to expatriate but is out of international offshore reporting compliance.  In this scenario, the client is unable to certify that they have been 5-years of compliance. 

Therefore, we develop a strategy to both get the client into offshore compliance and complete the 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.