The Importance of the Date of Expatriation & US Tax

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The Importance of the Date of Expatriation & US Tax

The Importance of the Date of Expatriation, Timing & US Tax Implications: In order to determine the potential exit tax consequences for a covered expatriate, one of the quintessential dates to consider is the date of expatriation. And, depending on the method the Taxpayer uses in order to formally perform the expatriating act — it may impact the date the person is consider to have expatriated from the United States. While this may not have a huge impact from a life perspective for the expatriate — it can have an enormous exit tax implication — which is why it is absolutely crucial to consider the date of expatriation and keep in mind why it is so important.

What is Considered the Expatriating Act?

Depending on whether the expatriate maintains expatriate status because they are a U.S. Citizen or because they are a Long-Term Resident impacts the expatriation process.

Here is how the Internal Revenue Service breaks it down on Form 8854 instructions:

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 the State Department issued a certificate of loss of nationality.

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

Date of Termination of Long-Term Residency

“If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.

      • The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.

      • The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).

      • The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.

      • If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date on which you commenced to be treated as a resident of that country under the treaty, did not waive the benefits of the treaty, and gave notice to the Secretary of such treatment. See Regulations section 301.7701(b)‐7 for information on other filing requirements.”

Example of the Different Tax Implications of Expatriation

For purposes of this example, it is important to note that if a person expatriates solely for tax purposes, then the IRS will want to continue enforcing certain tax requirements for the expatriate — so this example is not based on the concept of expatriating solely for tax purposes — but rather just the mere tax implications depending on the date of expatriation. For example, if a person wants to relinquish their Legal Permanent Residence status — and they are considered a Long-Term Resident, then the date of filing the form I-407 is consider the expatriating act. As provided above :

Therefore, even if it was to take USCIS a significant amount of time to process the form — presuming the form is processed as a result of the I -407 filing date, — then the date of expatriation should be the actual date it was filed. Therefore, if the Taxpayer undergoes a significant tax implication after filing the I 407 — even if it is still processing — they may have a position that their expatriation was the actual filing and there is no US tax liability.

Conversely, when a person is a U.S. citizen, the most common filing date of renouncing citizenship is the date that they take the oath.

As provided above:

      • 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).

This is a very important distinction. That is because oftentimes, the first time a person goes down to the consulate is not the time that they are given the oath. Usually, the consulate will require the Taxpayer to return in one-to-two weeks in order to take the oath. Therefore, just appearing at the consulate to get the process started is not going to be considered the expatriating act — unlike the form I-407 for permanent residents, in which filing the form serves as the expatriating act.

Beware of the Tax Consequences Date of Expatriation

It is important for taxpayers who are considered expatriates and will be formally relinquishing or renouncing their US person status to carefully evaluate this specific date and the action taken to determine whether or not it qualifies as the actual expatriating act, sufficient for the expatriate to plan any tax implications. Once the formal act of expatriation is performed, a Taxpayer generally cannot go back and unwind it.

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