What is Expatriation?
Expatriation is the process of renouncing a U.S person’s status.
Expatriation does not necessarily involve exit tax, and whether a person qualifies as an expatriate is not determined wholly by their net worth. If an expatriate is able to apply proper exit tax planning, they could potentially avoid, or minimise, exit tax.
Expatriation is not only for U.S. Citizens
An expatriate can also be a permanent resident as well as a U.S. citizen renouncing their U.S citizenship.
When a legal permanent resident has maintained the legal permanent resident status for a minimum of eight of the last 15 years, they are considered a long-term resident and subject to the covered expatriate analysis.
Please also note that allowing your green card to expire is not an acceptable or valid act of expatriation.
In order to be considered a covered expatriate, the expatriate must meet one of the three tests below:
- Net income tax liability
- Net worth
- Unable to certify tax compliance for five prior years.
The method of which a U.S. person takes to complete the expatriating act depends on whether a person is a long-term resident or a US citizen. This needs discussion and it is likely advice will be required to complete this process.
Covered Expatriate – Post Expatriation Consequences
It is best for the expatriate to avoid covered expatriate status as even after a covered expatriate leaves the United States, there may be following issues, such as:
- Annual Form 8854 filings
- Gift tax consequences for gifts from covered expatriates to U.S. persons (which will result in an immediate tax liability to the US person).
Exit Tax: Mark-to-Market & Deemed Distribution
Just because a person is considered a covered expatriate, does not mean they will owe exit tax.
The person must evaluate their assets to determine which assets are subject to the mark-to-mark analysis on the unrealized capital, and which assets are possibly subject to the deemed distribution rules.
If you would like to discuss this further, please contact us.