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Recent Economic Upheaval Creates Expatriation Opportunities For “US Persons” Living Abroad



JOHN RICHARDSON

As you know the US Section 877A Expatriation Tax applies to U.S. citizens and “Long Term Residents”. A “Long Term Resident” is an individual who has had a Green Card (as defined by the rules in Internal Revenue Code Section 7701(b)(6) for at least eight of the fifteen years prior to expatriation). This has become a serious problem for Green Card holders who simply move from the United States and and don’t take formal steps to sever their U.S. tax residency. (They must either file the I-407 or use a tax treaty tie breaker election to expatriate. Otherwise they may be in a situation where they have no right to live in the United States (having lost the immigration status) but are taxable on their worldwide income (still being tax citizens).

That said, whether you are a U.S. citizen wishing to renounce U.S. citizenship or a Long Term Resident wishing to sever U.S. tax residency, you do NOT want to be a “covered expatriate“. Generally, (unless one is subject to two exceptions – dual citizen from birth or expatriation between 18 and 181/2 – that are beyond the scope of this post), one is treated as a “covered expatriate” if one meets any one of these three tests:

1. Net worth of 2 million USD or more (which this post will focus on)

2. Average U.S. tax liability of more than approximately $165,000 USD over the five years prior to expatriation

3. Failure to certify U.S. tax compliance for the five years prior to expatriation.

The COVID-19 Panic – Falling asset values – more favourable exchange rates -2 million USD net worth test

The last couple of weeks have changed and continue to change our world. We are experiencing human misery on an unprecedented and global scale. This includes physical illness, fear of illness and social distancing. I live in a large city and I am beginning to see less variety in the food available. Self-employed people are seeing disruptions to their revenue streams, etc. I don’t want to keep listing examples. But it is very bad. On the economic front, we are seeing unprecedented and incalculable damage to the world economy. This includes (but is not limited to) falling asset values – how is your stock portfolio doing? We see currencies that are weakening relative to the U.S. dollar. (This means that a higher Canadian or Australian dollar net worth would equal 2 million USD.) As I write this post I just received a message, from someone advising me that the shares in a certain cruise ship stock, have fallen from $136 to $22. (My advice would be: Don’t spend money on the cruise. Instead buy the shares in the company.)

On the one hand:

The fall in asset values and weakening of currencies (for example the weakening of the Australian and Canadian dollars), has lowered people’s net worth in USD numbers. There are fewer “covered expatriates” in the world than there were before this crisis began. A recent Reddit thread describes an example of one person taking advantage of this. The thread – which includes a discussion of the relevant asset valuation date – is worth a read.

On the other hand:

The crisis has resulted in a reduction of opportunities for U.S. citizens to expatriate. Green Card holders (who are long term residents) are able to choose their expatriation date (creating more opportunities for them).

But, it may be with keeping in mind that:

Many countries, including the United States, have been closing their borders. At least for now, excluded individuals have NOT included citizens of the country. U.S. citizens and permanent residents (as far as I can tell) still DO have the right to enter the United States. Citizenship matters. Immigration status matters. Those renouncing U.S. citizenship will no longer have the easy access to the USA that citizens have.

Conclusion:

Life is never simple. It can be full of completely unexpected events. Changes in society result in opportunities lost and opportunities gained.

The COVID-19 crisis has created opportunities for “U.S. Persons” to expatriate and avoid the Section 877A Expatriation Tax. No question about it.

What follows is the Reddit thread referred to earlier.

PSA: Australian LTRs rejoice! Miserable exchange rate might make it a good time to file an I-407 from r/USExpatTaxes

Have a question? Contact John Richardson.

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The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a dual citizen. I am a lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

I am also a member of the American Citizens Abroad Professional Tax Advisory Council (PTAC). This is an advisory panel focused on assisting American Citizens Abroad in an FBAR and FATCA world.

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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