There are two types of expatriates: covered expatriates, and non-covered expatriates.
Covered expatriates must pretend that they sold all their worldwide assets on the day before expatriation and pay tax on the pretend gains. There are a few types of assets to which other special tax treatments apply if you are a covered expatriate, as well.
Non-covered expatriates do not have to do the pretend sale. They are required to inform the IRS about their expatriation on Form 8854, but without a giant gain recognition event.
There are three tests for covered expatriate status:
If you meet (or fail, depending on how you look at it) any one of these tests, you are a covered expatriate.... continue reading
Last month, I discussed how long-term residents can become expatriates. Now I will overview the tax paperwork expatriates will need to file.
All individuals who cease to be taxed as US persons file tax returns to signal that change in status to the IRS. Typically, this happens on a dual-status tax return: for part of the year you are a US person reporting your worldwide income, and for part of the year you are a nonresident of the US reporting only your US-source income.
For people whose change in status is also an expatriation event, there is another form to file: Form 8854, Initial and Annual Expatriation statement.... continue reading
Last month, I talked about citizens and how they can renounce their US citizenship. This month, I am focusing on another group of people who can become expatriates, known as long-term residents.
“Long-term resident” is a special term under US tax law. It looks and sounds very similar to “lawful permanent resident”, which is a term that is used to describe a type of US immigration status.
Everyone who has the immigration status of being a lawful permanent resident is automatically a US resident for tax purposes, and must pay tax on their worldwide income. Someone who has had that status for “too long” (as defined by the Internal Revenue Code) becomes a long-term resident.... continue reading
Last month, we covered a general overview of the exit tax, expatriation, and the distinction between covered and non-covered expatriates.
We will now 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
... continue reading
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