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October 25, 2013 - Phil Hodgen

Chapter 3 – Paperwork for Expatriates and Covered Expatriates

This chapter describes the paperwork facing Expatriates and Covered Expatriates.

Section 1.  Final Income Tax Returns

Both Expatriates and Covered Expatriates will file a dual-status income tax return for the year in which the expatriation event occurs.

A dual-status income tax return is one that reflects the fact that for part of the year you were a full U.S. taxpayer (filing Form 1040) and for part of the year you were a nonresident and noncitizen of the United States (filing Form 1040NR).

The technical method for doing this is described in IRS Publication 519, Chapter 6. You file a Form 1040NR because at the end of the year you were a nonresident alien. Attached to that tax return is a Form 1040.

Form 1040

On Form 1040 you report your worldwide income from January 1 of the expatriation year until the day before your expatriation date. You were a U.S. taxpayer for this time period.

You also include your exit tax liability here, if you are a Covered Expatriate, and the total tax liability on Form 1040 flows to your 1040NR.

Form 1040NR

On Form 1040NR, you report your income from the expatriation date until December 31. From the date you terminate your citizenship or permanent resident status, you are a nonresident alien for income tax purposes, so you only report your U.S.-source income. Any income you earned outside the United States will not be reported or taxed.

The tax liability reported on your Form 1040 also flows to the 1040NR and the total tax liability for both returns is reported here.

Form 8854

There is one more critical item that is attached to the income tax return you file in the year of expatriation: Form 8854. You have not logged out of the U.S. income tax system until you file it.

Be sure to file this on time.  Without fail.

Section 2.  Income Tax Returns:  Future Years

For all years after you expatriate, you will be treated as a nonresident alien for U.S. income tax purposes.

If you have income from the United States, there will probably be a requirement to file a U.S. income tax return (Form 1040NR). But if you have no assets in the United States and receive no income from U.S. sources, you need never file a U.S. income tax return again.

Section 3.  Form W-8CE

This is for Covered Expatriates only.

If you are Covered Expatriate, deferred compensation plans (think “pensions”), specified tax-deferred accounts (think “IRAs”), and beneficial interests in trusts will be taxed.

These assets are typically taxed as you–the Covered Expatriate–receive distributions. The tax is 30% of the amount distributed to you. In some cases the entire lump sum is taxed to you immediately, however.

No matter which method is used to calculate your income tax on these types of assets, you must give the pension plan administrator, the IRA administrator, or the trustee a Form W-8CE. This tells them that you are a Covered Expatriate and that they have an obligation to withhold income tax from distributions they make to you.

Form W-8CE must be given to them within 30 days after your expatriation date.

Expatriation