By Don D. Nelson, Attorney at Law, C.P.A.
There are essentially two steps you must
take to surrender your
U.S. Citizenship which are commonly referred to as "Expatriation." The first part involves the legal and
political aspects of surrendering your citizenship which is handled by the
U.S. State Department through the United States Embassies or Consuls
throughout the world. The second part involves filing
the required forms with the Internal Revenue Service and satisfying their
requirements. Both parts must be completed in order to successfully
terminate your citizenship.
To surrender your Green Card (permanent residence
status) you must meet with and fill out the proper forms with the Office of
Homeland Security and also file the proper forms with the IRS to end your
obligation to continue to pay US income taxes. There is normally a charge of
$450 for this process.
The legal or political part of surrendering
Citizenship requires that you
personally sit down with an Embassy or Consul representative to discuss the
repercussions of surrendering your citizenship. An example of the
forms they may have you fill out can be found
here. The US Embassy
will not let you surrender your citizenship until you have Citizenship in
another country. You should also keep in mind
that it is rumored that the U.S. makes it very difficult later to try to
reacquire US citizenship after you voluntarily renounce it. You may
have to acquire a vistor's visa in order to visit the US after you renounce your
Citizenship or Permanent Residency. Our clients who have surrendered their
Citizenship have not encountered any problem getting a Visitor's Visa
afterwards, but the granting of such a Visa is totally at the discretion of the
State Department and can be denied without due process.
The second part requires that you file
Form 8854 with the IRS
and bring your income tax return filing up to date as of the date you
surrender your citizenship or green card. The IRS rules are complex and you may need help
successfully navigating your way. We can help you with that form and plan
to
achieve the successful Tax surrender of your Citizenship or Permanent
Residency with the IRS. This form cannot be filed until the end of
the calendar year of the expatriation because the IRS issues new forms for each
calendar year in December.
Expatriation on or after June 17, 2008,
may cause an expatriate to be subject to IRC § 877A, which was enacted as
part of the Heroes Earnings Assistance and Relief Tax Act (HEART) Act of
2008. Generally, IRC § 877A imposes income tax on the net unrealized gain on
property held by certain U.S. citizens or green card holders who terminate
their US residency as if their worldwide property had been sold for its fair
market value on the day before the expatriation or residency termination
(mark-to-market tax). The Treasury Department and IRS have authority to
issue regulations under IRC § 877A.
New Expatriation Law
The provisions of IRC § 877A apply to all U.S.
citizens and former long-term permanent residents who expatriate on or after
June 17, 2008, (a covered expatriate) if they meet any of the following
three tests:
-
Net
Income Tax Test: For the five-year period before expatriation,
the individual had an average annual U.S. income tax liability
of at least $147,000 in 2010 (this number will be adjusted
annually); or
-
Net
Worth Test: The individual’s net worth is at least $2,000,000;
or
-
Certification Test: The individual fails to certify that he or
she satisfied all applicable U.S. tax obligations for the five
years before expatriation.
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A long-term permanent resident is any individual
who was a lawful permanent resident (green card holder) for any part of at
least 8 of the last 15 taxable years.
Exceptions may be applicable for certain
individuals with dual citizenship and individuals who relinquish citizenship
prior to age 18½.
Generally, the actual act of expatriation for a
U.S. citizen for tax purposes occurs when an individual formally renounces
U.S. citizenship. A U.S. citizen is treated as relinquishing citizenship on
the earliest of the following dates:
-
the
date on which he or she renounces nationality before a
diplomatic or consular officer of the U.S.;
-
the
date on which he or she furnishes a signed statement of
voluntary relinquishment to the U.S. Department of State;
-
the
date on which U.S. Department of State issues to the individual
a certificate of loss of nationality; or
-
the
date on which a U.S. court cancels a naturalized citizen’s
certificate of nationalization.
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Note that a renunciation or
relinquishment must be subsequently approved by the issuance to the
individual of a certificate of loss of nationality by the U.S. Department of
State. A green card holder is deemed to have expatriated on the date that
lawful permanent resident status ceases. This generally occurs either on the
date a green card is determined to have been revoked or judicially or
administratively abandoned, or on the first day of a tax year for which a
long-term permanent resident invokes a tax treaty to be treated as a
resident of a foreign country and does not waive the benefits offered by the
treaty to residents of such foreign country.
Imposition
of Mark-to-Market Tax
As previously indicated, IRC § 877A
subjects a covered expatriate to an income tax on the net unrealized gain on
their worldwide property as if the property had been sold for fair market
value on the day before expatriation. Losses may be taken into account, but
only to the extent of gains. Thus, application of the expatriation rules may
not result in a loss for tax purposes. The first $600,000 (indexed annually)
of net gain is excluded
for each expatriating
individual.
A basis
adjustment is applied to all property subject to the deemed sale provisions
to ensure that a future sale does not result in double taxation as a result
of the application of the deemed sale rules. For purposes of determining the
basis of property subject to the deemed sale rules, property that was held
by an individual on the date the individual first became a resident of the
U.S. may be treated as having a basis equal to the fair market value of such
property on the residency start date. An individual may elect not to have
this step-up in basis apply. Basis of property acquired after the residency
start date would be computed under the standard basis rules.
Special rules
apply to certain deferred compensation assets, certain interests in foreign
trusts, and specified tax-deferred accounts.
Deferral of
Tax
An election
may be made to defer payment of the mark-to-market tax imposed on the deemed
sale of property. Interest is charged, the election is irrevocable, and bond
(or other security) must be furnished. Generally, the deferred tax is due
when the return is due for the taxable year in which the property is
disposed, but may not be extended beyond the due date of the return for the
taxable year which includes the individual’s death.
Treatment
of Nonqualified Deferred Compensation
Special rules
are applicable for an eligible deferred compensation item. Generally, an
eligible deferred compensation item is any deferred compensation item with
respect to which
-
the payor is either a US person or certain non-US persons who
elect to be treated as a US person for purposes of withholding,
and
-
the covered expatriate notifies the
payor of the covered expatriate status and irrevocably waives
any claim to withholding reduction under any US treaty.
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With respect
to the payment of an eligible deferred compensation item (including certain
qualified retirement plans, foreign pension plans, deferred compensation, or
property transferred in connection with the performance of services to the
extent not previously included in income under IRC § 83), the payor must
deduct and withhold 30 percent of the payment. A payment is subject to
withholding to the extent it would be included in the individual’s gross
income if the individual was subject to tax as a U.S. citizen or resident.
The payment is also subject to tax under IRC § 871.
If a deferred
compensation item is not an eligible deferred compensation item (and not
subject to IRC § 83), an amount equal to the present value of the deferred
compensation item is treated as having been received on the day before the
expatriation date. For a deferred compensation item subject to IRC § 83, the
item is treated as becoming transferable and no longer subject to a
substantial risk of forfeiture on the date before the expatriation date.
Adjustments are made to subsequent distributions to take into account this
treatment. Additionally, the deemed distributions are not subject to early
distribution tax.
These rules do
not apply to the extent the deferred compensation is attributable to
services performed outside the US while the covered expatriate was not a
citizen or resident of the US.
Specified
Tax Deferred Accounts
For specified
tax-deferred accounts (such as individual retirement plan, qualified tuition
plans, a Coverdell education savings account, a health savings account, and
an Archer MSA), the account is treated as having been distributed on the day
before the expatriation date. The deemed distribution is subject to income
tax at ordinary income rates, however, the penalties normally applicable to
early withdrawals do not apply to a deemed distribution under the
expatriation rules. A basis adjustment is made to reflect the taxation
incurred as a result of the deemed distribution under the expatriation
rules.
Gifts and
Bequests from a Covered Expatriate
A U.S. person
who receives a gift or bequest from a covered expatriate is subject to U.S.
tax on the receipt of such gift or bequest. For this purpose, a gift or
bequest includes property acquired by gift directly (or indirectly) from a
covered expatriate or directly (or indirectly) by reason of the death of a
covered expatriate. The total value of the gift is first reduced by the
available annual exclusion ($13,000 in 2011; this number is indexed annually), and tax is
then assessed at the highest applicable gift tax rate at the time of the
gift (in 2008, the top gift tax rate is 45 percent). Special rules apply to
gifts or bequests made to domestic or foreign trusts by a covered
expatriate.
Read More Details of the Legal and Tax Rules Governing the successful Surrender
of your US Citizenship HERE
If you need assistance
with this complex area of tax law, we can assist you achieve your goals with
respect to the IRS. If you wish to discuss the legal aspects of
expatriation (Citizenship surrender or Green Card surrender) you should
consult a qualified immigration attorney. We have helped over one hundred
clients achieve their own expatriation without any problems or
complications for the over the past 4 years. We can help you achieve the same
successful result.
As a
US Attorney & CPA I can offer all of our clients the confidentiality and
privacy of "attorney client privilege" which cannot be matched by other
accountants, CPAs or enrolled agents. Request a min-consultation with Don Nelson
to discuss your situation and plan for your expatriation or green card
surrender:
Request Mini Consultation with an Attorney CPA with extensive experience
assisting clients surrender their US Citizenship Here
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