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The Dual-Citizen Exception to Escape Exit Tax & Transfer Tax
Dual Citizen Exception to Covered Expatriate Status
When a US person qualifies as either a US citizen or Long-Term Lawful Permanent Resident and wants to escape the US tax system, they will formally expatriate and either renounce their US Citizenship or relinquish their US person status. One of the biggest headaches about expatriating from the United States is that some taxpayers who are considered covered expatriates are required to conduct an exit tax calculation to determine whether they will become subject to the exit tax. While many people are aware of the potential mark-to-market tax implications, there are other issues as well such as deemed distributions of foreign ineligible pension plans and specified tax-deferred treatment of certain investments. Luckily, for some Taxpayers who qualify as dual-citizens/dual-nationals and meet both prongs of the exception — they may escape the potential tax implications of expatriating from the United States as a Covered Expatriate.
The Dual Citizen Exception
As provided by the IRS:
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- Exception for dual-citizens and certain minors.
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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) under Covered expatriate applies.
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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)
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Certain dual-citizens.
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You can qualify for the exception described above if you meet both of the following requirements.
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You became at birth a U.S. citizen and a citizen of another country and, as of your expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.
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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 you expatriated. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519
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Explaining the Dual Citizen Exception
It means that even if a person is considered a covered expatriate, they can potentially escape any potential exit tax if they qualify as a dual citizen. In order to meet the requirements, Taxpayers must have been born a US citizen as well as a citizen of another country – and continue to be a tax resident of that other country (as of the date of expatriation). In addition, the person was a resident of the United States for no more than 10 years of the 15 years prior to the expatriation date.
As you can see, the requirements are very strict — but for taxpayers who can meet the requirements, they may escape hundreds of thousands if not millions of dollars in tax.
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