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January 20, 2010 - Phil Hodgen

Leaving the USA and leaving U.S. tax law behind you

We’re working on a rash of cases in which people are giving up their permanent resident visas or U.S. citizenship — expatriation cases. Expect a few blog posts along the way.

Key resource for you

Here’s a link to the IRS website and Notice 2009-85. This notice was published in October, 2009 and is the administrative guidance for how to do this. Read it and weep. There is a quiz later. (j/k)

Immigration action needed

Let’s talk about permanent residents, for instance. The process very generally is that you need to give up your immigration status as a permanent resident. The voluntary method for doing this is by filing Form I-407 and a few other things; take a look at the U.S. Embassy’s website for the United Kingdom with its procedure for abandonment of permanent resident status.

Key point here: save yourself some brain damage and contact the Embassy where you’ll be going to do this. Talk to them about what THEY want you to do. Remember, when Mama’s happy, everybody’s happy. And the Embassy personnel = yo’ Mama.

Tax action needed

Until you jump through the hoops for the IRS, you’ll still be a U.S. taxpayer, even if you successfully lose your visa status as a permanent resident.

Let me repeat that. Giving up your green card does not log you out of the U.S. tax system and if the U.S. government catches you they’ll think you are taxable on all of your worldwide income. You have to file the right forms with the IRS to successfully do this.

The major form involved is Form 8854 (PDF).

Advice for would-be U.S. residents

Because of the expatriation process and the potential for taxation if you leave the country, I am now recommending to would-be immigrants that they NOT enter the United States with an eye to permanent resident visa status unless there is a good reason for doing so. Choose an alternate visa status if you want to come to the United States to live.

The expatriation tax problem

The tax problem for expatriation is simple — if the tax law applies to you, there is a “pretend” sale of all of your assets when you leave the United States. All of that “pretend” capital gain ends up being a very real cash tax liability to you, and you have to pay the U.S. Treasury a whacking big tax payment in order to successfully leave the United States.

We informally refer to this as an “exit tax.” As you go through the exit door, the U.S. taxes you.

Yes there are various exceptions and exclusions.

But if you can avoid the mess entirely, I would recommend that you do so.

Expatriation