U.S. Expatriation – Tax Information When Renouncing

Larry Stolberg

Renunciation of U.S. citizenship is an expatriation event requiring the filing of IRS Form 8854 with your tax return for year of expatriation. Renunciation has a fee of US $2,350.

Renunciation is voluntary and requires an appointment for receiving a certificate of loss of nationality.

In March 2016, all renunciation applications go to the American Citizen Services Unit in Vancouver for screening and review before an appointment is set at one of the U.S. consulates. It is my understanding that the initial screening may take more than 60 days with an interview at one of the consulates months later. You need identification, proof of second citizenship and residence outside of the United States.

If you are a green-holder, for 8 of the last 15 years, otherwise classified as a long-term permanent resident and wish to return it, that is also an expatriation event requiring IRS Form 8854.

Presently the exit regime in place is IRC Section 877A. There are exemptions to the exit regime for dual citizens and for those wishing to renounce prior to attaining age 18.5.

If you don’t meet the foregoing exemptions, you need to meet the following:

  1. Net worth at the date of expatriation not exceeding US$2M
  2. Average annual income tax liability for 5 years prior to expatriation not exceeding $162,000 (2017 threshold)
  3. You filed complete and accurate tax return including information returns and met your tax obligations for 5 years prior to expatriation and sign under penalties of perjury that you have met this condition.

If you don’t meet exceptions 1 or 2, you are considered a covered expatriate (‘CE”). If you meet exceptions 1 or 2 but not 3, then you are again a CE.

If you enter the Streamlined Foreign Offshore Procedure to become compliant, you may file 5 years as opposed to 3 years of delinquent/late-filed returns to speed up the process.

The exit tax or market-to market regime is represented as the following:

  1. Income tax on unrealized capital gains exceeding US$699,000 (2017 threshold) for the year of expatriation.
  2. U.S. non-resident withholding tax at the domestic rate per the IRC of 30% as opposed to a lower Treaty rate for deferred compensation items such as your 401K payments paid to you when you are not a resident of the United States. Exclusion from the higher withholding tax are plans to the extent the compensation is attributable to services performed outside the United States while you as a CE were not a U.S. citizen or a resident of the United States.
  3. Immediate taxation of the present value of “specified” deferred or ineligible deferred compensation items such as your IRA.
  4. Imposition of estate or gift tax on the recipient of certain gifts or bequests from a CE who after June 16, 2008 expatriated (IRC Section 2801)

Reference may be made to IRS Notice 2009-85 for extensive details and computations as well as the IRS Code and Regulations.

Larry Stolberg, CPA, CA, CPA (South Carolina), has been practicing as a full-time tax specialist for over 30 years, in the Toronto, Ontario Canada and surrounding GTA area with primary emphasis on:

•Corporate restructuring for business owners
•Estate/succession planning
•U.S. expatriate and cross border issues
•Tax efficient planning that will achieve both your short and long term objectives

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