[This is Chapter 2 of the Student Edition of my Exit Tax book.]
The exit tax rules apply to you if you are an “Expatriate.” Avoid that status and you do not have an exit tax problem at all. You do not even need to do the extra tax paperwork required by the exit tax rules.
This chapter discusses the definition of “Expatriate.”
Section 1. U.S. Citizens
A U.S. person who gives up his or her citizenship may be subjected to the exit tax—if citizenship is terminated in the manner described in Section 877A, the person will be an expatriate.
A U.S. citizen, for tax purposes, is defined in Treasury Regulations Section 1.1-1(c) as follows:
“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 U.S.C. 1401-1459).”
In a few special cases (such as persons born in American Samoa) an individual may be a U.S. “national” but not a U.S. citizen. Such a person will not be subjected to the exit tax: he or she does not have the necessary status as “citizen” to qualify for exit tax treatment under Section 877A.
Someone who has filed documents to be naturalized as a citizen will not be treated as a citizen for income tax until the final order of naturalization is issued.
A U.S. citizen has an expatriation event on the date that one of the following events occurs:
- The individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State,
- The individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State,
- The United States Department of State issues to the individual a certificate of loss of nationality, or
- A court of the United States cancels a naturalized citizen’s certificate of naturalization.
In each case, there is an objective event to point to: the U.S. government issues a piece of paper saying you are not a citizen anymore, or a U.S. court issues an order. Citizens can unambiguously point to an event—and a time—when they became an “expatriate” for purposes of U.S. income tax.
Citizenship plus an expatriation event means that you are subjected to the exit tax rules. You are an “expatriate.” The implications of this (for paperwork required from you and for possible income tax, estate tax, and gift tax consequences) are explored in later chapters.
Section 2. Long-Term Residents
“Long-term residents” (a defined phrase in Section 877A) may also become expatriates, if they change status (i.e., have an “expatriation event” in the parlance of the exit tax rules) in one of the ways described in Section 877A.
A long-term resident of the United States is someone who was a “lawful permanent resident” for a sufficient length of time. Specifically:
“[T]he term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in subparagraph (A) or (B) of paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.”
A long-term resident is therefore someone who:
- Is a “lawful permanent resident,” and
- Holds that status for a sufficiently long period of time, with special counting rules applied.
Lawful permanent resident
“Lawful permanent resident” is a term of art that appears in the Internal Revenue Code and the Immigration and Naturalization Act. It is important to focus on the phrase using the tax law perspective. For income tax purposes:
“an individual is a lawful permanent resident of the United States at any time if–
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).”
There is only one category of immigrant visa, colloquially known as a “green card” visa. All other visa categories are nonimmigrant visas, even if they confer the right to live and work in the United States.
This tax law definition of “lawful permanent resident” relies entirely on status conferred or removed as a matter of immigration law. The person will be a lawful permanent resident for U.S. income tax purposes as long as the individual has been granted the right to live in the United States as an immigrant, and that status has not been terminated in ways clearly defined by immigration law.
Becoming a lawful permanent resident will not—alone—expose you to the exit tax. To be a long-term resident, you must have held the status of lawful permanent resident for the correct minimum amount of time.
You are a long-term resident (for purposes of the exit tax) when you hold lawful permanent resident status “in” at least eight out of the last 15 years.
You hold lawful permanent resident status in a calendar year if your immigration status existed at any time in the calendar year. Even one day will trigger this status.
Treaty election years don’t count
When determining whether you have been a lawful permanent resident for a sufficient number of years, you exclude a year in which you make an election under an income tax treaty to be treated as a resident of another country for income tax purposes, and you do not waive the benefits of the treaty that are applicable to residents of that country.
[A]n individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.
This election is made on Form 8833. In almost every treaty, the provision of the relevant income tax treaty will be Article 4.
The fifteen-year period ends with the year that you give up your green card. Count backwards 15 years from there.
Warning about treaty elections
The interaction of treaty elections with the exit tax can get a bit confusing.
- Making an election before you have held lawful permanent resident status “in” at least 8 out of the last 15 years will cause you to simply not count that year toward the “in at least 8 out of the last 15 years” requirement. It postpones the moment at which you become subject to the exit tax.
- If you make an election under an income treaty to be treated as a nonresident of the United States after you have held permanent status “in” at least 8 out of the last 15 years, you have a problem—that treaty election is itself treated as an event of expatriation subjecting you to the exit tax.
Long-Term Residents need an expatriation event to be subjected to the exit tax. There are two ways this can happen.
Revoke or Abandon Status
For a green card holder, termination of lawful permanent resident status will occur when that immigration status is revoked, or when there is an administrative or judicial determination that immigrant status has been abandoned.
The green card is revoked if the green card holder goes through the necessary paperwork to achieve this result. It involves filing Form I-407. For green card holders who go through the process of filing Form I-407 and formally canceling their green cards at a Consulate or Embassy, the effective date for termination of green card status is the date that the individual appears at the Consulate or Embassy.
The second way in which a long-term resident can expatriate is by making an election to be treated as a resident of another country under the terms of an applicable income tax treaty.
The rule for termination of lawful permanent resident status because of a treaty election has three requirements:
- The individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country,
- The individual does not waive the benefits of such treaty applicable to residents of the foreign country, and
- The individual notifies the Secretary of the commencement of such treatment.
A valid election to be treated as a resident of another country (and therefore a nonresident of the United States) using an income tax treaty is made on Form 8833.
Permanent Resident + Time = Expatriate
Permanent resident (“green card”) status in at least 8 of the prior 15 years, plus an expatriation event, will make you an Expatriate for the exit tax rules.