5-Step Analysis: Covered Expatriate & Exit Tax 

Are you a U.S. Citizen?

All U.S. Citizens who intend on renouncing their U.S. Citizenship are required to analyze their financials in accordance with the Covered Expatriate tests to determine if they meet the definition of a Covered Expatriate.

Are you a Legal Permanent Resident?

A Legal Permanent Resident (LPR) may also be subject to Exit Tax at the time that they relinquish their Legal Permanent Resident Status (aka Green Card). In order to be considered an LPR who may be subject to Exit Tax, the expatriate must be meet the definition of a Long-Term Resident (LTR).

Have You Been a Long-Term Legal Permanent Resident?

As provided by the IRS: “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.” Two important things to keep in mind: 1. It does not require 8-full years; and 2. It does not require that you actually resided in the U.S. while you were an LPR.

Do You Meet One of the Covered Expatriate Tests?

When a person is a U.S. Citizen or Long-Term Resident and they want to expatriate — they may be considered a Covered Expatriate. Only a Covered Expatriate is subject to Exit Tax. There are three different tests, and the Covered Expatriate needs to only meet one of the test: 1 Net-Worth Test; 2. Net Income Tax Liability Test; or 3. Unable to certify 5-years tax compliance.

Will You be Subject to Exit Tax?

 Not necessarily. Just because a person is a covered expatriate does not mean they will be subject to the exit tax. First, they may qualify for an exception. Second, the exit tax depends on whether they have a mark-to-market gain or deemed distribution at expatriation. In other words, just being a covered expatriate does not mean the person will also be subject to U.S. exit tax.

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