Expatriation Tax – What US Expats should know before Renouncing US citizenship may seem like a good decision, especially if you have dual citizenship or have been living outside the US for several years and plan to do so indefinitely. By giving up your citizenship, you will not have to file the annual tax returns to declare your worldwide income to the Internal Revenue Service (for years after renunciation).
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Plan before you Renounce US Citizenship – Expatriation Tax
However, before you move forward, there are some things you should be aware of regarding Expatriation Exit Tax:
Even though you will not have to file US tax returns in the future (unless you receive income sourced in the US), you will need to file a “final” tax return to report income and deductions from January 1 to the date of the oath of renunciation taken at the US Embassy.
- Section 877A of the Internal Revenue Code, enacted in 2008 under the Heroes Earnings Assistance and Relief Act, establishes a stringent exit tax applicable to “covered expatriates”. A covered expatriate is an individual that meets any portion of a three-part test and is renouncing his or her US citizenship after June 17, 2008. The three-part test requirements are met if any of the following are true:
- Net Worth Test – individual had a net worth of $2 million USD or more at the time of renunciation
- Tax Liability Test – individual had an average annual net income tax liability of more than $201,000 USD (indexed annually) in the last 5 years ending before the date of renunciation
- Compliance Test – individual failed to certify that he or she had complied with all US Federal tax obligation for the last 5 years preceding the date of expatriation.
There are exceptions to the exit tax that essentially apply to dual citizens who were born in and continue to live in the country of their other nationality and to citizens who did not live in the US for more than 10 years before the age of 18 ½ years.
- There is a fee to give up your US citizenship! The US Government charges a fee to relinquish US citizenship.
Expatriation Tax
If you are a covered expatriate, the IRS treats you as if you:
- Sold all worldwide assets the day before expatriation
- Pay capital gains tax on unrealized gains above an exclusion
(≈ $866,000, indexed)
Assets subject to exit tax
- Stocks, funds, real estate
- Business interests
- Certain trusts
- Other as applicable
Special rules apply to
- Pensions
- Deferred compensation
- Trusts
- What is NOT eliminated by renunciation
Renouncing citizenship does not erase:
- Past tax debts
- Unfiled returns
- IRS penalties
- FBAR penalties
The IRS can still pursue collection internationally.
Green card holders: special note
Long-term green card holders (8 of last 15 years) are subject to the same expatriation tax rules when abandoning residency.
- Special IRS Rule for Expatriation of Minors (under age 18 ½)
Minors may be exempt from “covered expatriate” status under IRC §877A(g)(1)(B):
A person is NOT a covered expatriate if:
- They expatriate before age 18½, and
- They have been a U.S. resident for 10 years or less
- Requirements apply
Generally, Expatriation Tax will likely not apply to most people giving up their US Citizenship, however due to the complexity of the US Tax Law regarding Expatriation, is it advisable to get advise regarding your specific situation so there are no surprises later.