Overview of Expatriation

Overview of Expatriation

I. Long-term resident

Defined by I.R.C. Section 877(e)(2) to mean any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the expatriation event occurs. See also I.R.C. Section 877A(g)(2).

II. Expatriation Event

Individual ceases to be a lawful permanent resident of the United States (within the meaning of I.R.C. Section 7701(b)(6)).[1] This happens in the following way:

  • the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or
  • the individual:
    • commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country,
    • does not waive the benefits of the treaty applicable to residents of the foreign country, and
    • notifies the IRS of such treatment on Forms 8833 and 8854.

III. Expatriate (Form 8854)

I.R.C. Section 877A expatriation rules apply if:

  • Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015).
  • Your net worth is $2 million or more on the date of your expatriation or termination of residency.
  • You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.

IV. Three Tests

Special rules apply for specified tax deferred accounts (I.R.C. Section 877A(e)), deferred compensation (I.R.C. Section 877A(d)), trust distributions (I.R.C. Section 877A(f)).

V. Covered Expatriate – Paperwork (Form 8854) Plus Tax

Everything else is treated as a deemed sale in a mark-to-market (gain/loss recognized) (I.R.C. Section 877A(a)(1)).[2] First $699,000 of capital gain, indexed for inflation, is exempted from taxation. That is approximately $725,000 for 2020.[3]

 


[1] “[A]n individual is a lawful permanent resident of the United States at any time if — (A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and (B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned). An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.” I.R.C. Section 7701(b)(6)

[2] I.R.C. Section 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date.  Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code.  Any loss from the deemed sale is taken into account for the tax year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of I.R.C. Section 1091 do not apply.

[3] I.R.C. Section 877A(a)(3); Rev. Proc. 2016-55; Notice 2009-85.

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