Expatriation: Divorcing The Government Has Tax Consequences

As someone who moved around a lot with my parents in my childhood, any kind of displacement conjures up vivid images of huge wooden crates, packers and sad goodbyes. But life is no longer as simple as crates, packers and going-away gifts, many US citizens who had relocated and moved abroad are deciding to renounce their US citizenship. 2013 was a record-breaking year that saw an alarming increase (221%-according to the Treasury Department of US) of Americans renouncing their citizenship. Why such a drastic move? A big reason is the global tax reporting requirement and FATCA.

I read this somewhere, that “expatriation is like divorcing a government”. As heart-wrenching and final as that may sound, it is made even more complex by the tax provisions under Internal Revenue Code (IRC) sections 877 and 877A. So if you decide on taking such a step, what would be the tax consequences?

These rules apply to US citizens who have renounced their citizenship and long-term residents (defined in IRC 877(e)) who have ended their US resident status for federal tax purposes. The rules differ based on the date of expatriation. For the sake of today’s blog post, we will discuss the latest date which is June 16,2008.

Expatriation on or after June 16, 2008: The new IRC 877A rules apply to you if ANY of the following statements apply,

Your average annual net income tax for the last 5 years ending before the date of expatriation or termination of residency is $157,000 or more for 2014.
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 last 5 years.

If any of the above rules apply to you, you are a “covered expatriate”. And you have to pay exit tax.

The exit tax is like a capital gains tax because all the property of the covered expatriate is deemed sold for its fair market value on the day before the expatriation date.

There is an exclusion amount for the exit tax, for 2014, it is $680,000.

A US Citizen can relinquish his/ her citizenship on the earliest of FOUR possible dates:

1. When he/she appears before a diplomatic/ consular officer.
2. The date on which she/ he sends a statement of voluntary relinquishment to the US Department of State.
3. The date the US Department of State issues a certificate of loss of nationality.
4. The date a US court cancels a certificate of naturalization.

Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.

The fee for renunciation of US citizenship is $2,350.

The important take away points from this blog post are that, in order to renounce your US citizenship, you have to prove you have been regular in filing your tax returns for the past 5 years and if you are worth more than $2 million or you have been paying income tax of $157,000 or more (for 2014), you have to pay an exit tax.

The decision to expatriate is not to be taken lightly. Always consult the right professional who can guide you with respect to your unique circumstances.

Bibliography: Pub 519;; Internal Revenue Codes 877 & 877A; Department of Treasury

I am Manasa Nadig, enrolled to practice and represent taxpayers with the Internal Revenue Service. I have been in the business of Tax Preparation & Tax Planning since 1999. My firm, MN Tax Solutions, LLC is based in Michigan, USA. Please connect with me on TaxConnections for more information about myself & the services provided by my firm.

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