By Bethany Bouw, CPA
We see much in the news about people expatriating – jokes related to a political climate (regardless of administration), trying to avoid tax (think that Facebook co-founder who renounced citizenship), and those who have spent the majority of their lives abroad, etc. Unfortunately, relinquishing citizenship and ending long-term residency is not as easy as mailing in your passport or green card and booking a flight with your belongings. There is much more involved from a tax perspective when expatriating and it should be done with input from an attorney and a qualified tax professional. Below you will find 10 starting questions and answers regarding expatriation and Form 8854, Initial and Annual Expatriation Statement.
1) What is expatriation?
Expatriation can simply mean temporarily residing outside of your native land OR the acts of relinquishing your citizenship and terminating long-term residency. It is important to keep your accountant in the loop as you make this transition as there are tax issues associated, whether it is the temporary or permanent type. In this article, the phrases expatriate and expatriation are being used to refer to the latter definition.
2) What is long-term residency?
If you were a lawful permanent resident in at least 8 of the last 15 years ending with the year your status ends, then you are a long-term resident. For example, if you have been a green card holder in the U.S. for the past seven years, should you officially terminate your long-term residency before hitting the 8-year mark, the rules of expatriation would not apply to you. Should you be considered a lawful permanent U.S. resident for 8 years or more before deciding to leave and forfeit your residency, you would still be considered an expatriate.
There is an exception if there are years in the determination that you were treated as a resident of a foreign country under a tax treaty and did not waive the benefits afforded you as a resident of the country.
3) What date did I expatriate?
The date of relinquishing your citizenship is considered to be the earliest date in which any of the following occurred:
- You renounced before a diplomatic or consular officer of the US
- The date you gave the State Department a signed statement of your voluntary relinquishment
- The date the State Department issued you a loss of nationality certificate, or
- The date the US court canceled your naturalization certification
The date of terminating your long-term residency is considered to be the earliest date in which any of the following occurred:
- You file with the Dept. of Homeland Security voluntarily abandoning your lawful permanent resident status
- The date you become subject to a final administrative order regarding abandonment of lawful permanent residence
- The date you are subject to removal as of a final administrative/judicial order, or
- The date that as a dual resident with a treaty country you gave notice to the Secretary of your residence in the treaty country on Form 8833
4) Why does the date I expatriated matter?
The date impacts the various rules that apply to your specific situation. There are three periods of time to consider for varying rules:
- Expatriation after June 16, 2008
- Expatriation after June 3, 2004, and before June 17, 2008
- Expatriation before June 4, 2004
5) What does expatriation after June 16, 2008, and before 2017 mean?
You will need to file an annual Form 8854 if you expatriated between June 16, 2008, and January 1, 2017, AND you deferred payment of tax, have an item of eligible deferred compensation, or have an interest in a non-grantor trust.
6) What does expatriation after January 1, 2017 mean?
If you expatriated in the current tax year (at time of writing, forms are issued for the year ending December 31, 2017), you will need to file an annual Form 8854.
If you meet the covered expatriate rules in the year of your expatriation, for those who have expatriated after June 16, 2008, you will be subject to income tax on the net unrealized gain in your property (calculated as if your property had been sold at fair market value on the date before your expatriation date). Being a covered expatriate can also impact your ability to gift and pass assets on to your inheritors.
7) What is a covered expatriate?
Under the after-June 16, 2008 rules, there are several ways to be a covered expatriate:
- Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is in excess of a specified annual amount published by the IRS
- Net worth is or exceeds $2,000,000 on the date of expatriation
- You fail to certify on your Form 8854 that you have been in compliance for the last 5 tax years leading up to the date of expatriation with all federal tax obligations
8) Are there any exceptions to being a covered expatriate?
There may be an exception to being treated as a covered expatriate for dual citizens and minors.
9) What gets reported on an initial Form 8854?
An initial Form 8854 will disclose general information about the filer. General information includes things like addresses, country of residence, expatriation date, days spent in the US, and countries of citizenship. For 2017, an initial filing will complete Part IV reporting items such as previous tax liabilities, net worth, property held, and information about any deferral of tax.
10) If I expatriated in 2017, when do I file the Form 8854?
If you have an initial filing, it is attached to the income tax return for that year that includes the expatriation date. For example, if you expatriated on June 30, 2017 you would file the Form 8854 with your 2017 tax return. The Form 8854 then is filed in accordance with your income tax return due dates.
If you are planning to expatriate or have already done so, you should strongly consider seeking out a qualified tax professional and an international tax attorney. There may also be additional forms required that relate to your final tax return as you expatriate. Though they may not be listed in this article, such forms may still apply given individual taxpayer’s situations. Please check out Ryan & Wetmore’s list of major international tax forms (this list is not all-inclusive and is ongoing). For many of the foreign forms, the statute for the year may not have started running if there was a form required that was not filed or was incomplete. It is very important to engage qualified tax professionals to assist with these forms.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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