Sometimes U.S. citizens and green card holders relinquish their citizenship or legal permanent resident status. This may make sense if you primarily live in another country and want to avoid being taxed on your worldwide income by the IRS. However, you still may be subject to an expatriation tax after you give up your citizenship or green card. When you surrender your status, you will need to notify the IRS that you are current on your U.S. taxes over the last five years. This involves submitting Form 8854, regardless of whether you are subject to the expatriation tax. Failing to file Form 8854 may result in being subject to the expatriation tax if you otherwise would not have been subject to it.
The expatriation tax applies to unrealized gains related to the entire estate of an expatriate. The tax may cover U.S. citizens who formally lost their citizenship, such as by voluntarily renouncing it, as well as long-term residents whose green cards were canceled. You will be considered a long-term resident if you held a green card for eight of the last 15 years before your legal permanent resident status ended. If you fit within one of these two categories, you probably will be subject to the tax if you had a net worth of $2 million or more on the date of your expatriation, you had an average net income of at least a certain amount (adjusted periodically) during the last five years before your expatriation, or you failed to file Form 8854 after your expatriation. Some dual citizens and children may not be subject to the tax even if they fit within these categories.
Calculating the Expatriation Tax
Income covered by the expatriation tax consists of any net unrealized gains or losses in an expatriate’s assets, calculated as though their property had been sold for its fair market value on the day before they expatriated. It covers assets anywhere in the world and applies a capital gains rate to the sale of those assets.
Deductions and other tax breaks that normally would be available to citizens or green card holders usually do not apply. However, a general expatriation tax exclusion is available. This amount varies depending on the date of expatriation. If the total profit from a hypothetical sale of your assets is less than the exclusion amount, you will not need to pay any expatriation tax. Only wealthy people thus need to pay an expatriation tax in most cases.
Certain types of assets are fully exempt from the expatriation tax, such as tax-deferred accounts, property held in non-grantor trusts, and certain types of deferred compensation. Any calculation of the expatriation tax will not account for these assets.