Voluntary Renouncing or Surrendering of Your U.S. Citizenship or Permanent Residency (Green Card) - Tax Aspects and Requirements of Expatriation (IRS Form 8854)
The process of relinquishing one's U.S. citizenship is referred to as "Expatriation." There are legal as well as political issues that must be addressed upfront, and the U.S. handles these matters via U.S. Embassies and Consulates. After these matters have been resolved, one must satisfy the requirements set forth by the Internal Revenue Service. Both the Legal/Political and Tax processes must be completed before expatriation can be achieved.
The process in which one surrenders a Green Card (permanent resident status) is similar. The U.S. resident must file paperwork with the Office of Homeland Security. And, as is the case with a citizen, must meet the requirements of the IRS. This obligation of the IRS will effectively cancel, for the permanent resident, any future U.S. tax obligation.
The first step of renouncing one's U.S. citizenship involves a face-to-face meeting with either a consul or embassy representative. This representative should discuss, in detail, the repercussions of surrendering U.S. citizenship. For example, if you have not first obtained citizenship in another country, relinquishing your U.S. citizenship would leave you without a country! This may result in your being unable to travel. Along the same lines, you might not be able to set up new residency anywhere else in the world. Though experts disagree on the following, it should be noted that many claim U.S. citizenship almost impossible to reclaim after it has been surrendered. In order to even visit the U.S. you may have to acquire a visa.
In fulfilling the IRS requirements, you are obligated to file Form 8854. Additionally, you must be sure that you are up to date with your income tax filing. This applies to both citizens and permanent residents. This is a complicated process, and it will be important for you to contact a professional who specializes in expatriate tax issues. At Taxes for Expats, we are familiar with form 8854, and the entire process of relinquishing one's U.S. citizenship, and can simplify this seemingly overwhelming situation.
IRC § 877A
As of June 17th, 2008, certain elements were added to the process of expatriation. After this date, an expatriate may be obligated to the rules of IRC § 877A. In simplified terms, IRC § 877A taxes the all of the property held by an expatriate, on their last day as a U.S. citizen or permanent resident, as if it had been sold for its fair market value. This taxed "net gain" is, of course, unrealized by the expatriate and is referred to as a mark-to-market tax. IRC § 877A applies if any one the following requirements are met.
- Net Income Tax Test: For the five-year period before expatriation, the individual had an average annual U.S. income tax liability of at least $139,000 in 2008 (this number will be adjusted annually); or
- Net Worth Test: The individual's net worth is at least $2,000,000; or
- Certification Test: The individual fails to certify that he or she satisfied all applicable U.S. tax obligations for the five years before expatriation.
The term "long-term permanent resident" applies to anyone who was a legal permanent resident (green card holder) for eight out of the past fifteen taxable years. An exception is often applied to those with dual citizenship or those who surrender citizenship before age eighteen and one half.
Under normal circumstances, expatriation (as recognized by the IRS) happens on the day that U.S. citizenship is surrendered. The earliest dates that expatriation is recognized are:
- the date on which he or she renounces nationality before a diplomatic or consular officer of the U.S.;
- the date on which he or she furnishes a signed statement of voluntary relinquishment to the U.S. Department of State;
- the date on which U.S. Department of State issues to the individual a certificate of loss of nationality; or
- the date on which a U.S. court cancels a naturalized citizen's certificate of nationalization.
The surrender of U.S. citizenship must be recognized by the proper authorities. Once approved, the U.S. Department of State will issue a certificate indicating, "Loss of Nationality" to the then expatriate. In the case of a green card holder, he/she expatriates on the date that permanent resident status lawfully ends. This date may be due to a revoked or a surrendered green card. Also, if the green card holder initiates a tax treaty and wishes to be treated as a resident of a foreign country, the date on which the tax treaty is invoked may result in a surrendered green card.
As noted, IRC § 877A subjects an expatriate to a tax on unrealized income. All property, world wide, held by the expatriate on their last day as a U.S. citizen, is taxed as if it had been sold for fair market value. This process may not result in a loss, however, and the first $600,000 of net gain is non-taxable for someone in the process of expatriation.
An adjustment is applied to the expatriating person's property so that, if/when it is sold in the future, the sale does not result in double taxation. Also, (if desired by the expatriating person) any property held on the day before becoming a U.S. citizen or green card holder may be taxed based on the value it possessed on that date. Special rules may apply to: deferred compensation assets, foreign trusts interest, and tax-deferred accounts.
Deferral of Payment
In regard to mark-to-market tax, the expatriating individual may elect to defer payment. If he elects to do so, interest is charged and the election stands until the filing date of the year in which the property is actually sold. A bond must be furnished when this option is chosen. If the expatriate dies before the property is sold, payment is due by the filing date in the year of the expatriate's death.
Nonqualified Deferred Compensation
- the payor is either a US person or certain non-US persons who elect to be treated as a US person for purposes of withholding, and
- the covered expatriate notifies the payor of the covered expatriate status and irrevocably waives any claim to withholding reduction under any US treaty.
In regards to payment on deferred compensation, the payor is to deduct and withhold 30% of the full amount of payment. This applies to some retirement plans, deferred compensation, foreign pension plans etc. This 30% withholding applies to any payment that would be relevant to the expatriate's gross income if he/she was subject to U.S. taxation as a resident or citizen. IRC § 871 applies to these situations.
If an item about which deferred compensation is sought is not eligible for such (and if IRC § 83 does not apply), the present value of the item is seen as having been received one day before expatriation. In cases where IRC § 83 does apply, the item is viewed as "transferable" on that same date. An adjustment is made to future distributions and they are not taxed under early distribution tax. These rules only apply to services provided while the expatriate was a U.S. resident or citizen.
Specified Tax Deferred Accounts
In the case of specified tax-deferred accounts (individual retirement plans, Coverdell education savings accounts, qualified tuition plans, an Archer MSA, and health savings accounts), the account will be treated as if it had been distributed one day before expatriation. Distribution is subject to normal income rates. The penalties for early withdrawal, however, do not apply to the deemed distribution of an expatriate. An adjustment is made that will reflect the resulting taxes of the distribution.
Gifts and Bequests from a Covered Expatriate
When a U.S. resident or citizen receives a gift from a covered expatriate, said gift is subject to U.S. taxation. The term gift applies to property and inheritance. The value of the gift, however, is reduced by whatever amount is current as the annual exclusion (in 2008 it was $12,000). After the exclusion, the gift is taxed under the highest rate available (45% in 2008). Gifts made to trusts are subject to special rules.
Last Piece of Advice - Seek Professional Help
The complexities surrounding expatriation can be more than a little overwhelming, especially in regard to taxation. If you require help with this complicated area of tax law we can help you with respect to the IRS. If you wish to discuss the legal aspects of expatriation (i.e. surrendering your citizenship or Green Card) you should consult a qualified immigration attorney. We have helped scores of clients achieve successful expatriation without any issues over the last five years.