The Expatriation Tax provisions under the Internal Revenue Code 877 and 877A apply to U.S. citizens who have renounced their citizenship and long term residents (as defined in section 877(e)) who have ended their U.S. resident status for Federal Tax purposes. Different rules apply according to the date upon which you expatriated.
There are basically two steps you must take in order to surrender your U.S. Citizenship or otherwise known as "Expatriation." The first part involves the legal and political aspects of surrendering your citizenship which is handled by the U.S. State Department. The second part involves filing the required forms with the Internal Revenue Service and meeting all the requirements. In order to successfully terminate your citizenship, these two steps must be completed.
Surrendering Citizenship requires that you personally sit down with an Embassy or Consul representative to discuss the ramifications of giving up your citizenship. The US Embassy will not let you surrender your citizenship until you have Citizenship in another country. In order to visit the US after you renounce your Citizenship or Permanent Residency, you may need to acquire a Visitor Visa.
The second part requires filing Form 8854 with the IRS and having your income tax return filings up to date. The IRS rules are complex and you may need help successfully navigating your way. Our firm can help you with every aspect of this process to achieve the successful Tax surrender of your Citizenship or Permanent Residency with the IRS. This form must be filed at the end of the calendar year of the expatriation because the IRS issues new forms for each calendar year in December.
Expatriation on or after June 17, 2008
If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015).
- Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate.”
A citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates:
- the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States, provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State;
- the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State;
- the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or
- the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.
For long-term residents, as defined in IRC 7701(b)(6), a long-term resident ceases to be a lawful permanent resident if:
The individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or the individual:
- commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country,
- does not waive the benefits of the treaty applicable to residents of the foreign country, and
- notifies the IRS of such treatment on Forms 8833 and 8854.
Expatriation after June 3, 2004 and before June 17, 2008
The American Jobs Creation Act (AJCA) of 2004 amends IRC section 877, which provides for an alternative tax regime for certain, expatriated individuals. Amended IRC 877 creates objective criteria to impose the tax on individuals with an average income tax liability for the 5 prior years of $124,000 for tax year 2004, $127,000 for tax year 2005, $131,000 for 2006, $136,000 for 2007, or $139,000 for 2008, or a net worth of $2,000,000 on the date of expatriation. In addition, it requires individuals to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation and requires annual information reporting for each taxable year during which an individual is subject to the rules of IRC 877.
Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.
Finally, even if they do not meet the monetary thresholds for imposition of the IRC 877 expatriation tax, IRC 7701(n) provides that individuals will continue to be treated as U.S. citizens or long-term residents for U.S. tax purposes until they have notified both the Internal Revenue Service (via Form 8854) and the Secretary of the Department of State (for former U.S. citizens) or the Department of Homeland Security (for long-term permanent residents) of their expatriation or termination of residency.
Also, for individuals who expatriated after June 3, 2004, and before June 17, 2008, IRC 6039G requires annual information reporting for each taxable year during which such an individual is subject to the rules of IRC 877. Form 8854 is due on the date that the individual’s U.S. income tax return for the taxable year is due or would be due if such a return were required to be filed.
Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions have been revised to permit individuals who expatriated after June 3, 2004, and before June 17, 2008, to meet the new notification and information reporting requirements under IRC 6039G.
Expatriation on or before June 3, 2004
The expatriation tax provisions (prior to the AJCA amendments) apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their U.S. residency for tax purposes, if one of the principal purposes of the action is the avoidance of U.S. taxes. You are presumed to have tax avoidance as a principle purpose if:
- Your average annual net income tax for the last 5 tax years ending before the date of the expatriation act is more than $124,000, or
- Your net worth on the date of the expatriation act is $622,000 or more.
If you meet either of the tests shown above, you may be eligible to request a ruling from the IRS that you did not expatriate to avoid U.S. taxes. You must request this ruling within one year from the date of expatriation. For information that must be included in your ruling request, see Section IV of Notice 97-19. If you receive this ruling, the expatriation tax provisions do not apply.
The expatriation tax applies to the 10-year period following the date of the expatriation action. It is figured in the same way as for those individuals expatriating after June 3, 2004, and before June 17, 2008. Individuals who renounced their U.S. citizenship, or long-term residents that terminated their US residency, for tax purposes on or before June 3, 2004, must file an initial Form 8854, Initial and Annual Expatriation Information Statement.
Income Tax Returns must be filed!
This is just a brief overview of the complex requirements the IRS imposes on taxpayer's looking to Expatriate. At Marini & Associates P.A., we have helped hundreds of clients achieve this goal with our extensive knowledge and experience. To schedule a consultation, call us in Miami at (305) 374-4424 or toll free at (888) 882 9243 or contact us online.