September 30, 2011 - Phil Hodgen

Dual citizens and exit tax

I received a question from a reader:

Phil, enjoy your blogs they are very informative and funny at the same time. I would really like to know if a Canadian born American is subject to the exit tax if they have never lived or worked in the US.

Thanks in advance.

Yes.  You have to go through the exit tax processes.  The fact that you have that magic U.S. passport is enough to cause that unfortunate result.  You may be able to get out of paying any exit tax, but you will still have to do all of the paperwork and filing requirements — five years of up-to-date tax returns in the United States and the Form 8854.

Here is how it works.  A U.S. citizen who gives up citizenship is an “expatriate” for purposes of the exit tax rules.  So for you that is unavoidable.  With “expatriate” status comes a job of doing a lot of paperwork.

But what you really want to do is avoid “covered expatriate” status — this is where you have to do paperwork AND pay tax to the USA when you give up your citizenship.  You may be able to do this.

A quick excerpt from the Exit Tax book that I’m writing now (shameless pimping on my part!):

Regardless of your financial status, you are not a “covered expatriate” if you satisfy all of the following items [see Section 877A(g)(1)(B), Notice 2009-85, Section 2(B)]:

  • You became a U.S. citizen at birth; and
  • You also became a citizen of another country at birth; and
  • On your expatriation date you “continue” to be a citizen of that country; and
  • On your expatriation date you “continue” to be taxed as a resident of that country; and
  • On your expatriation date you were not a U.S resident for 10 of the 15 tax years that end with the year that you expatriated.

Note, however, that you will still have to certify that you are up to date with all U.S. tax requirements.  Failure to do so will render you a covered expatriate even if you satisfy all of the dual citizenship requirements.


Your action plan should be:

  1. Make sure you have five years of clean U.S. tax returns on file with the IRS already. E.g., if you give up citizenship in 2012 be sure that 2011, 2010, 2009, 2008, and 2007 U.S. tax returns are all hunky dory.
  2. Make sure you fit within this exception to “covered” expatriate status.  This answer won’t necessarily be obvious or easy.  But it might.  E.g., what does it mean to “become a citizen of another country at birth.”  What if you didn’t qualify for that citizenship until your parents did a bunch of paperwork for you which they got around to doing when you were 15 years old?
  3. THEN AND ONLY THEN give up your U.S. citizenship.
  4. Do your “year of expatriation” U.S. income tax returns plus Form 8854.
  5. Throw a party for all of your friends.