For US expats ready to renounce their citizenship, understanding the final legal and tax steps is essential. Form 8854, the Initial and Annual Expatriation Statement, marks the conclusive stage in breaking ties with the U.S. tax system. At 1040 Abroad, we specialize in navigating the complexities of Form 8854, offering the insights needed to finalize your departure from U.S. tax obligations confidently. This article is your definitive guide to completing Form 8854, the ultimate step in your expatriation journey.
WHAT IS FORM 8854?
Form 8854 is a tax form used by long-term residents relinquishing their Green Card and U.S. citizens renouncing their citizenship. Until you file it, you will remain a U.S. person for tax purposes. The form declares expatriation and compliance with IRS requirements, marking your official departure from U.S. tax obligations.
Note: A long-term resident, for the purposes of Form 8854, is an individual who has held a green card in at least 8 of the last 15-tax-year period before the year of expatriation.
WHAT IS THE PURPOSE OF FORM 8854?
Form 8854 has several key purposes:
- To notify the IRS of your expatriation or termination of long-term residency.
- To certify that you have complied with all U.S. federal tax obligations for the five years preceding the year of your expatriation.
- To determine if an individual is a “covered expatriate” under U.S. tax law, which has implications for their tax liabilities.
- To calculate the exit tax, if applicable, under sections 877 and 877A of the Internal Revenue Code.
Importantly, for U.S. citizens who have renounced their citizenship, filing Form 8854 is necessary to formally cease being considered a U.S. person for income tax purposes. This step is essential to ensure compliance with U.S. tax laws and avoid continuing U.S. tax obligations.
WHO IS CONSIDERED A COVERED EXPATRIATE?
A “covered expatriate” is an individual who meets any of the following criteria at the time of their expatriation from the United States:
- Net Income Tax Liability Test: If the individual’s average annual net income tax for the five years ending before the date of expatriation exceeds a specified threshold, which is adjusted annually for inflation. For 2023, this threshold is $178,000.
- Net Worth Test: If the individual’s net worth is $2 million or more on the date of their expatriation.
- Compliance Test: If the individual fails to certify on Form 8854 that they have complied with all U.S. federal tax obligations for the five years preceding the year of expatriation.
Five-year Tax Compliance Rule: it requires U.S. citizens and long-term residents who expatriate to certify that they have been compliant with their U.S. tax obligations for the five years prior to their expatriation.
WHO NEEDS TO FILE FORM 8854?
US citizens and green card holders who relinquish their citizenship or permanent resident status are required to file Form 8854, in line with the provisions outlined by the IRS under section 877A. US permanent residents are taxed on their worldwide income, and the year in which they give up their citizenship is no exception. They are required to submit a Dual Status Return for the year they expatriate. This involves filing a 1040 (Dual Status Statement) for the period they were still a US citizen or resident in that year, and a 1040NR (Dual Status Return) for the rest of the year after their status changed along with Form 8854. This process, necessary for those who have changed their residency status or experienced a loss of nationality, ensures compliance with US filing requirements.
It’s important to note that these returns cannot be filed jointly due to the personal nature of the change in immigration status.
WHEN TO FILE FORM 8854?
You should file your initial Form 8854 alongside your income tax return for the year that includes the date of your expatriation. This should be done by the due date of your tax return, including any extensions. If you’re attaching Form 8854 to Form 1040, 1040-SR, or 1040-NR, ensure it’s filed within this timeframe. Additionally, send a copy of Form 8854, marked as “Copy,” to the designated address.
WHERE TO FILE?
To file your Form 8854, you should send it to the following address:
Internal Revenue Service
3651 S IH35
MS 4301AUSC
Austin, TX 78741
HOW TO FILE FORM 8854?
Here’s a guide on how to file Form 8854, incorporating the specific instructions provided by the IRS:
- Part I – General Information: This section gathers basic information and must be completed by all filers, addressing aspects from your address to your expatriation details:
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- Identifying Number: Use your U.S. social security number as your identifying number. If you don’t have one, attach a statement explaining why.
- Address: If using a P.O. box due to no street delivery, include this instead of your street address.
- Residency for Tax Purposes: Specify the country where you’re considered a resident for tax purposes, which might differ from where your principal residence is located.
- Expatriation Information: Indicate whether your expatriation occurred in the filing year or before, and provide your expatriation date, aligning with the day before your expatriation for deemed sale calculations.
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- Financial Information: Utilize the balance sheet section to outline your net worth, listing all assets and liabilities at fair market value on the day before your expatriation date. This includes property basis, foreign assets, and considerations for dual citizens.
- Tax Compliance: Confirm compliance with your tax obligations for the 5 years preceding your expatriation, covering all required filings and payments, crucial for avoiding complications with expatriation rules.
- Property and Deferred Compensation: Disclose information about any property owned and deferred compensation items, adhering to the valuation principles for property and understanding the implications for foreign country assets and foreign pensions.
- Filing and Submission: Attach your completed Form 8854 to your income tax return if you are required to file one for the year of your expatriation. If not filing a return, send Form 8854 directly to the IRS at the address provided for those undergoing the expatriation process.
- Tax Deferral Agreement: If electing to defer payment of tax due, follow the instructions in Part II, Section D, Line 5, for submitting your tax deferral agreement request, ensuring tax compliance and addressing any unrealized capital gains from deemed sales.
Remember, thorough documentation and adherence to the form instructions are key in the filing of Form 8854, ensuring compliance with the U.S. tax system as you navigate the complexities of expatriation. This includes understanding the implications for dual citizens, addressing worldwide assets, and ensuring compliance with the expatriation rules and tax obligations associated with leaving U.S. residency or citizenship.
FILING YOUR FINAL TAX RETURN WITH 1040 ABROAD Contact Olivier Wagner, 1040 Abroad
