Last month, we covered a general overview of the exit tax, expatriation, and the distinction between covered and non-covered expatriates.
For the February issue, we will focus on the ways in which a US citizen can expatriate, and on what date that expatriation becomes effective.
The Internal Revenue Code, or tax law, definition of a US citizen points to the definition from immigration law. This is the tax law definition of a US citizen: 1
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Every person born or naturalized in the United States and subject to its jurisdiction is a citizen. For other rules governing the acquisition of citizenship, see Chapters 1 and 2 of Title III of the Immigration and Nationality Act (8 USC 1401-1459).
The term “exit tax” is not used or defined in the Code or regulations anywhere. It is a shorthand to describe the federal law that requires some citizens and green card holders who are leaving the US tax system to pay US tax, one last time, on their worldwide assets.
The defining feature of the exit tax is that all assets are treated as if they are sold on the day before citizenship or resident status is terminated. If there are any profits from the pretend sale, you pay tax on those profits.... continue reading
This week we are talking about dual-status returns. An email reader sent us this question, asking what his income tax return should look like in the year of expatriation:
I file 1040 covering income up to the date of renunciation. Do I have to file 1040NR from the date of renunciation to the end of the year if I don’t have any US source income at all for either before or after renouncing?
The expatriation year income tax return is a little more complicated than that. It is slightly difficult to figure out whether you need to file Form 1040NR or Form 1040 as your tax return.... continue reading
Over the course of two days last week, I received three questions about the interaction of treaty elections, long-term resident status, and expatriation.
It seems there exists some confusion about what happens when a lawful permanent resident makes a treaty election to be taxed as a resident of another country: Does it cause you to expatriate? Does it prevent you from becoming an expatriate?
I am not surprised this confusion exists. Depending on when the treaty election is made, it could either cause you to expatriate or prevent you from becoming an expatriate.... continue reading
Of the three tests that an expatriate must meet to be non-covered, the certification test is the most difficult to understand. It is also the only test to which there are no exceptions – fail this test, and you are a covered expatriate.
Today’s topic will be limited to a general discussion of what it means to pass this test.
Expatriation occurs when a US citizen or “long-term resident” terminates his or her citizenship or permanent residence. 1
If the expatriate meets certain thresholds for net worth and the amount of tax they have been paying over the last five years, he or she will be what is known as a covered expatriate.... continue reading