Expatriation Tax – US Wegzugsbesteuerung

IRS on  Expatriation Tax
Form 8854 – Initial and Annual Expatriation Statement
Instructions for Form 8854
IRS Publication 519 – residence rules, dual status tax return
Notice 2009-85 – the only thing the IRS has published on expatriation so far
Internal Revenue Code Sections  877,   877A – the old and current exit tax rules, respectively
Internal Revenue Manual Section 3.21.3.74.5 – how the IRS will process your return
Proposed Regulations Under Section 2801 – Gifts and Bequests from Covered Expatriates
Other Taxes – A Trap for the Unwary

Criteria for Becoming a Covered Expatriate

An individual is considered a covered expatriate if they meet at least one of the following three tests:

1. Tax Liability Test: The individual has an average annual net income tax liability exceeding a specified inflation-adjusted amount for the five years before expatriation.
2. Net Worth Test: The individual possesses a net worth of $2 million or more on the expatriation date.
3. Certification Test: The individual fails to certify, under penalty of perjury, compliance with all US federal tax obligations for the five years preceding expatriation.

Special Rules for Dual Citizens at Birth

Dual citizens who acquire US citizenship and citizenship in another country at birth may be exempt from the tax liability and net worth tests if they continue to hold citizenship and tax residency in another country. However, they must not have been a US resident for more than ten years within the 15 years leading up to expatriation. These individuals are still subject to the certification test.

Exit Tax for Covered Expatriates

Covered expatriates must pay a mark-to-market exit tax on their worldwide assets based on their value the day before expatriation. This tax is imposed on a deemed disposition of the assets, meaning the tax is applied as if the assets were sold and then repurchased by the expatriate.

Filing Requirements and Tax Compliance

Expatriates who renounce their US citizenship or abandon lawful permanent resident status must file Form 8854, the Initial and Annual Expatriation Statement, with their US tax return. This form certifies compliance with US federal tax obligations and provides information related to the exit tax. Failure to file Form 8854 or comply with other tax obligations may result in significant penalties or an extended statute of limitations for tax assessment.

Gift and Estate Tax for Covered Expatriates

Unlike gifts and inheritances from non-Covered Expatriates, gifts and inheritances from Covered Expatriates to US citizens are subject to US gift or estate tax, regardless of whether the donor or decedent resides abroad at the time of the gift or death.

Reporting Requirements for US Citizens Receiving Gifts or Inheritances from Covered Expatriates

US citizens who receive gifts or inheritances from Covered Expatriates may need to report these assets on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This reporting requirement applies if the value of the gifts or inheritances exceeds certain thresholds.

US Tax Basis for Gifts and Inheritances from Covered Expatriates

Special rules apply to the tax basis for gifts and inherited assets from Covered Expatriates for US citizens. Generally, the tax basis for gifts and inherited assets from Covered Expatriates is the fair market value of the assets at the time of the gift or death.

In conclusion, understanding what it means to be a covered expatriate is crucial for individuals considering expatriation. This status has significant tax implications, and proper planning, compliance, and filing are essential to avoid potential penalties and complications.

Purpose of Form 8854

The primary purpose of Form 8854 is to help the Internal Revenue Service (IRS) determine whether an individual is a covered expatriate and subject to the exit tax. Additionally, the form certifies that the expatriate has fulfilled their US tax obligations for the five years preceding expatriation, as required by the certification test.

Who Needs to File Form 8854?

Individuals who relinquish their US citizenship or abandon their lawful permanent resident status are required to file Form 8854. This includes those who renounce their citizenship at a US embassy or consulate or those who abandon their green card by filing Form I-407 with the Department of Homeland Security.

Filing Requirements and Deadlines

Form 8854 must be filed with the expatriate’s US tax return for the year of expatriation. The filing deadline for Form 8854 generally coincides with the regular tax return filing deadline, which is typically April 15th of the following year. However, expatriates residing abroad may qualify for an automatic two-month extension, making their filing deadline June 15th.

Information Required on Form 8854

Form 8854 requires expatriates to provide various information, including:

1. Personal information: Name, address, Social Security number, and date of birth.
2. Expatriation details: Date and method of expatriation, such as renouncing citizenship or abandoning lawful permanent resident status.
3. Tax compliance: Certification of compliance with all US federal tax obligations for the five taxable years preceding expatriation.
4. Net worth and tax liability tests: Information related to the expatriate’s net worth and average annual net income tax liability for the five years before expatriation.
5. Exit tax calculation: For covered expatriates, details about worldwide assets, including their fair market value and cost basis, are required for calculating the exit tax.

Consequences of Not Filing Form 8854

Failure to file Form 8854 or comply with other tax obligations may result in significant penalties or an extended statute of limitations for tax assessment. Expatriates must ensure accurate and timely filing of Form 8854 to avoid these potential consequences.

In summary, Form 8854 is a crucial document for individuals relinquishing their US citizenship or lawful permanent resident status. Proper understanding, compliance, and filing are essential to avoid complications and potential penalties related to expatriation.

Eligibility Criteria for the Relief Procedures

The Relief Procedures for Certain Former Citizens are designed for individuals who:

1. Have not filed US tax returns as citizens or residents.
2. Owe a limited amount of back taxes to the United States.
3. Possess net assets below $2 million.

Those who relinquished their US citizenship anytime after March 18, 2010, are eligible, provided they meet the other criteria outlined in the procedures.

Benefits of the Relief Procedures

The relief procedures allow eligible individuals to become compliant with their US tax and filing obligations without facing penalties for back taxes. This process provides a more straightforward path for Accidental Americans to resolve their tax situation and, if desired, renounce their US citizenship.

No Set Termination Date for the Relief Procedures

The IRS has not established a specific termination date for these relief procedures. However, they will announce a closing date before ending the program, giving individuals ample time to take advantage of the opportunity to become compliant with their US tax obligations.

Taking Advantage of the Relief Procedures

Accidental Americans who meet the eligibility criteria and wish to renounce their US citizenship should consider using the Relief Procedures for Certain Former Citizens. These procedures offer a valuable opportunity to resolve tax compliance issues and avoid potential penalties associated with non-compliance.

In summary, the IRS’s relief procedures provide a viable solution for eligible Accidental Americans to become compliant with their US tax and filing obligations and renounce their US citizenship. Understanding the eligibility criteria and the process can help affected individuals navigate this opportunity and achieve tax compliance.