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
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 fact that the tax Code refers to the Immigration and Nationality Act means that for tax purposes, we can generally use the same definition of a citizen that is used under federal law.
In normal conversation, the terms “national” and “citizen” are often used interchangeably. But they are not identical. And for our purposes here, only citizens can be subject to the exit tax. Nationals who are not citizens cannot be subject to exit tax.
A “national” of the United States is someone who owes allegiance to the US either because they are a citizen or for some other reason.2 All US citizens are nationals of the United States.3 Not all nationals are citizens, however.4
This is an interesting fact. It is also a fact that means we do not need to be concerned with whether someone is a national of the United States, because the status of being a national is not what is important for exit tax. Only citizens who relinquish or renounce their US citizenship can be expatriates,5 and only expatriates can be subject to the exit tax.6
Here is how the Internal Revenue Code defines the term “expatriate”:7
any United States citizen who relinquishes his citizenship, and any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
Notice that there is no mention of nationals in the definition of an expatriate. That means someone who is a national but not a citizen can terminate their status as a US national without triggering exit tax. For our purposes, it only matters what it means to be a citizen, because those are the people who can potentially become subject to the exit tax.
Because citizens who relinquish or renounce their citizenship are the people who need to be concerned with the exit tax, let’s look at what it means to be a citizen of the United States.
One way to become a citizen of the US is by birth. Being born in the United States is the easiest way to accomplish this. But there are ways to become a US citizen by birth if you are born outside the United States, as well.8 Because we are focusing on the tax law side of expatriation, I will ignore the intricacies of immigration law and the ways in which a person may become a US citizen by birth.
The other way to become a citizen of the US is by naturalization.9 Like with citizenship by birth, the details of the naturalization process are unimportant for tax purposes. All that matters is the result – you are a US citizen.
Having multiple citizenships is a non-issue for US tax law. If you are a US citizen, any other passports you have do not matter (in fact, it is usually the case that an individual will have at least one other citizenship before expatriating from the US). You are taxed as a citizen of the US, and if you relinquish your citizenship, you will be an expatriate.
There are a few different ways in which a US citizen can become an expatriate. It can be a voluntary or non-voluntary act. Most of the time, it is voluntary. All voluntary acts that result in the termination of US citizenship are called “relinquishment”.10
The most common way that US citizenship is relinquished is by renunciation. This requires filling out some paperwork and appearing in front of a consular official. The act of expatriation occurs when:11
the individual renounces his or her US 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 USC 1481(a)(5)).
If someone relinquishes their US nationality, their citizenship goes with it. Recall that citizens are a subset of nationals. So relinquishing nationality also has the effect of relinquishing citizenship.
A US citizen is not treated as relinquishing their nationality until a Certificate of Loss of Nationality is issued by the State Department.12
There are ways other than renunciation whereby a US citizen can terminate their citizenship. A citizen can relinquish US nationality by taking certain actions with the intent of terminating his US nationality:13
The individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of US 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 USC 1481(a)(1)-(4)).
The methods specified in those four paragraphs for relinquishing US nationality are:
Note that in addition to taking one of these actions, the US citizen who wants to terminate their citizenship must also get a Certificate of Loss of Nationality from the State Department confirming their relinquishment of US nationality for it to be effective for tax law.20
The vast majority of people who cease to be US citizens do so voluntarily. But it is also possible for naturalized citizens to lose citizenship if a court cancels the certificate of naturalization.21
Whatever action you take to relinquish your citizenship, you do not cease to be a citizen of the US until the government says you are no longer a citizen.
This is critical for expatriation. A citizen who relinquishes citizenship must know exactly when they have expatriated: that date serves as an important dividing line. Before expatriation, all income earned is taxed in the US. After expatriation, only income that is from US sources is taxed in the US.
“Expatriation date” is a term defined in the Internal Revenue Code. It means the date on which an individual relinquishes citizenship.22 Relinquishment of citizenship by renunciation is deemed to occur on the earlier of two dates.23 Relinquishment by other means is a bit more complicated.
The most common method of expatriating – relinquishment of citizenship by renunciation – has an easy path for determining the expatriation date. You compare two dates and select the earlier of the two:
Because you have to take the oath of renunciation before the Certificate of Loss of Nationality is issued, the earlier of those two days will always be the date of the oath of renunciation.
The other methods for expatriating create a paradox when you are trying to figure out what the expatriation date is.
Relinquishment of citizenship for methods other than renunciation is deemed to occur on the date that you submit paperwork to the State Department claiming that you have renounced your citizenship. For tax purposes, your date of relinquishment is:27
the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States 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 USC 1481(a)(1)-(4)).
For tax purposes, you do not stop being a citizen (and therefore a US taxpayer) when the relinquishing event occurs. It is only when you submit a statement to the State Department that you are deemed to have expatriated.
This is where the paradox arises. For immigration purposes, you are no longer a national of the US when the relinquishing event occurs, regardless of whether you submit a statement to the State Department. But under tax law, you remain a citizen – for tax purposes – until you apply for the Certificate of Loss of Nationality. That means you can be both a citizen and a non-national at the same time: a citizen under tax law, but not a national under immigration law.
Only applying for a Certificate of Loss of Nationality will terminate your citizenship for tax purposes, even if the application is filed years after the relinquishing event.
This matters for some, but not most, expatriates. Before June 16, 2008, citizens who gave up their citizenship were not “expatriates” – so they did not have to pay exit tax.
If you had an expatriating event that took place prior to June 16, 2008, but do not apply for a Certificate of Loss of Nationality until 2019, then under the Internal Revenue Code definition you are an expatriate, and potentially subject to exit tax.
I have seen an alternate interpretation that because you ceased to be a national of the US prior to the enactment of the exit tax law, that you cannot be an expatriate and cannot be subject to the exit tax.
There are disagreements among lawyers about how this should or would play out. I don’t know the answer, and I can’t offer any advice as to what course of action to take if this is your situation. But you may want to seek advice from a lawyer.
US citizenship plus an expatriating event makes you an expatriate. Some expatriates are subject to the exit tax rules. Unless your US citizenship is forcibly terminated by the US government (which is rare), the expatriating event will be an act of relinquishment.
The tax implications of ceasing to be a US citizen will be explored in future issues this year.
Remember: This blog post is not advice to you. Get help from a professional, tailored to your specific situation, if you need advice.