Just knowing the paperwork you need to file with the IRS is not enough – you need to know when to file, too. Let’s talk about tax filing deadlines for Expatriates.
Here are the possible tax filings that you may need to do. Not all of these will necessarily apply to you.
- Prior year amended tax returns. If you need to fix problems in order to pass the certification test, you will be filing remedial paperwork for one or more of the five calendar years before the year in which you expatriate.
- Gift tax return. If you need to reduce your wealth in order to pass the net worth test, you may be making taxable gifts. You will need to file a gift tax return to report the gifts.
- Expatriation year income tax return. You will be filing an income tax for the year in which you expatriate.
- Form W-8CE. If you are a covered expatriate, you will be giving Form W-8CE to a variety of people, on a very short deadline.
- Form 8854. You will file Form 8854 to tell the IRS that you have expatriate.
- Form W-8BEN. If you have U.S. income payable to you after you expatriate, the person paying you will need to get Form W-8BEN.
Prior Year Amended Tax Returns (Optional)
You are a covered expatriate if you fail the certification test.
You fail the certification test if you:
[fail] to certify under penalty of perjury that [you have] met the requirements of this title for the 5 preceding taxable years or [fail] to submit such evidence of such compliance as the Secretary may require.1
You may need to fix some shortcomings so you can pass the certification test. If so, you have some tax paperwork to file, and maybe some tax to pay.
When do you “certify under penalty of perjury”? The government has not told us, but it makes sense that you make the statement under penalty of perjury when you sign and date Form 8854. That is the way it works with income tax returns.
Deadline: Before You File Form 8854
This means that before you file Form 8854
you need to have all of your paperwork on file with the IRS and all of the taxes, penalties, and interest paid for the prior five years. I recommend that you clean things up – if you can – before you expatriate. What if you made a mistake? What if you computed the tax wrong? What if penalties and interest are assessed and you have not paid the bill by the time you file Form 8854?
Gift Tax Return (Optional)
You are a covered expatriate if you have a net worth of $2,000,000 or more on the date of your expatriation.2
If your net worth is greater than $2,000,000, you can give away assets to bring your net worth below $2,000,000 and therefore avoid covered expatriate status. You should make these gifts in the calendar year before
the year in which you expatriate. Otherwise, you will not be entitled to use the unified credit to eliminate the gift tax payable on that gift.
Your net worth is greater than $2,000,000, and you will make a taxable gift to someone in order to reduce your net worth below $2,000,000, in order to avoid covered expatriate status.
You should make the gift in 2017, and expatriate in 2018.
Green card holders living abroad have a different set of gift tax rules. If they are not domiciled in the United States (“domicile” is a term of art) then the U.S. gift tax rules apply to gifts of U.S. real property and tangible personal property only.
This is a complex area and you should ask for help if your net worth is greater than $2,000,000.
Deadline: April 15, or Whatever Extension You Have (Abroad: Typically June 15)
Gift tax returns have the same filing deadlines as income tax returns: April 15 of the year following the year in which the gift was made.3
. If you have a valid extension of time to file your income tax return, that extension also automatically extends the filing deadline for your gift tax return.4
Typically, Americans with their true “abodes” abroad have a June 15 filing deadline. They have an automatic two month extension to file their tax returns.5
And you can, of course, file Form 4868 to extend the filing deadline until October 15. You can also (with a bit of effort) get a further extension until December 15.
Expatriation Year Income Tax Return
You will file an income tax return for the year in which you expatriate. For part of the year you were a U.S. taxpayer, and for part of the year, you were not. The tax return is typically a nonresident income tax return (Form 1040-NR) prepared as a dual-status return. This simply means that you report the tax results for the part of the year as a resident separately from the tax results for the part of the year that you were a nonresident.
Deadline: June 15 or Extension
Your filing status for income tax returns is based on your personal status on December 31. This means that in the year of expatriation you will be a nonresident for U.S. income tax purposes – you gave up your U.S. citizenship or your green card. (You could still be a U.S. resident based on the number of days you spent in the USA in your expatriation year, or by making an election to be a U.S. taxpayer, but let’s ignore these edge cases).
A nonresident’s filing deadline for a U.S. income tax return is June 15,6
unless the nonresident had wages on which U.S. income tax was withheld. In that case, the deadline is April 15.7
Extensions are possible, using Form 4868 to get an October 15 deadline. A further extension to December 15 is also possible.
Form W-8CE is used to notify certain people that you are a covered expatriate. Your failure to give Form W-8CE to these people on time can range from inconsequential to financially catastrophic.
Here are the categories of assets that will trigger the requirement for a covered expatriate to give Form W-8CE to someone:
- Eligible deferred compensation. If you have “eligible” deferred compensation or pension,8 you must give Form W-8CE to the plan administrator. “Eligible” usually means the plan is run by a U.S. administrator.
- Specified tax-deferred accounts. If you have an IRA, Coverdell education savings account, 529 plan, Health Savings Account, or Archer MSA,9 you must give Form W-8CE to the plan administrator.
- Beneficiary of a nongrantor trust. If you are a beneficiary of a nongrantor trust, you must give Form W-8CE to the trustee.10
Deadline: 30 Days After Expatriation Date
The deadline for delivering Form W-8CE is the earlier of the date of the first distribution you receive after expatriation, or 30 days after your expatriation date.11
Practically speaking, this means that you have a deadline of 30 days after your expatriation date.
Massive Financial Risk
The problem for failing to meet this deadline lies with the eligible deferred compensation or pension that you have. After you expatriate, the normal tax rule is that you pay 30% off the top as tax from every payment you receive. If you miss the 30 day deadline for delivering Form W-8CE, your eligible deferred compensation income becomes ineligible
deferred compensation. For ineligible deferred compensation, the tax rule is that you pretend that you received a lump sum distribution from your pension on the day before you expatriate.12
Pay 30% from the monthly pension benefits as you receive them? Or pretend that you received a lifetime’s worth of pension payments on the day before you expatriate, and pay tax on that giant lump sum? Those are the stakes you are playing for.
Form 8854 is how you tell the IRS that you are logging out of the U.S. tax system. Everyone who thinks about expatriating will focus on this form.
Deadline: Same as Income Tax Return
The deadline for filing Form 8854 is the same as the filing deadline for income tax returns: typically June 15, but maybe April 15. Plus extensions, if you apply for them properly.
Form W-8BEN (Optional)
If you have income sources or bank accounts in the United States after you expatriate, you will need to notify the institution making the payment of your new status as a nonresident for income tax purposes. This notifies the institution that they should withhold the appropriate amount of tax from payments made to you.
Deadline: Before Receiving the Next Payment
You should send Form W-8BEN as soon as possible, but before receiving the next payment of income.
The reason is that you want your tax withholding to be correct. If tax withholding is correct, you probably will be exempt from preparing and filing a U.S. income tax return. If you owe tax, you will need to file a tax return to claim a refund.