October 28, 2014 - Phil Hodgen

What to do if you want to expatriate in 2014

You should subscribe to the Expatriation Only email list. You’ll get a weekly email that usually answers someone’s question about expatriation. The subject is always expatriation. This is the email that went out earlier today.

Hi from Phil Hodgen.

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This Week

Hello from The Coffee Fox in Savannah, Georgia.  If you like Horchata (and I certainly do) then I suggest you order a Horchata Latte, then sit outside and watch the people pass by on Broughton Street.  When this goes out to you on Tuesday I will be standing on a dock somewhere on Saint Simons Island, waiting for a boat to Little St. Simons Island.

The year is almost over.  If you want to expatriate in 2014, you will need to move fast.  I have been having many conversations with people who want to renounce citizenship or cancel their green cards—I probably met twenty or so in Dubai or Riyadh when I was there two weeks ago.

(Shhhh.  Super secret message to the U.S. government.  The people I met in the Middle East who want to cut their ties to the United States are well-educated professionals and entrepreneurs.  The U.S. policy objective of chasing these people away from the United States is working well.  Carry on.  We don’t need achievers and builders and educated, intelligent people hanging around the United States.)  /sarcasm

This week’s email is a distilled version of my conversations in the Middle East.  This is the decision-making process you need to go through if you want to expatriate in 2014—either renounce your citizenship or abandon your green card.

1.  Can you even get an appointment?

The first problem is the most obvious:  make sure you can force the Bureaucracy to meet you and do what you want them to do.  This is harder for citizens who want to renounce, and easier for green card holders.

a. Renunciation of Citizenship

In order to expatriate in 2014, you need to formally renounce your citizenship in 2014.  If you have a green card, you need to get your Form I-407 submitted during 2014.

This means the hurdle is bureaucracy.  You need the bureaucrats to schedule an appointment (or the two appointments) at your favorite Embassy or Consulate to renounce your passport.

November and December are full of holidays.  There will be a lot of people who want to expatriate in 2014.  The number of appointment slots will be limited.  Get your appointment set early.

You can go anywhere in the world to renounce your citizenship.

A few years ago the Vancouver Consulate bounced a bunch of people out of their December appointments and into January.  Those people missed their expatriation date target.  Be careful.  That might happen to you.

b. Abandon Green Card

The process of abandoning a green card is easier.  Form I-407 is the magic paperwork and the moment it is submitted is the moment you have abandoned your green card status.

The paperwork can be submitted in person or by mail.  Just be sure you can get this done before December 31, 2014.

c. Your Action Step

Your job right now is to start dialing the phone.

For citizens giving up their U.S. citizenship, start calling Embassies and Consulates anywhere until you can be assured that you will have your renunciation appointment before December 31, 2014.  If the appointment slots are available, make the appointment.  You can always cancel later.

For green card holders, call and see what the Embassy or Consulate wants you to do.  From recent experience, the Consulate in Sydney was pretty relaxed:  “just mail it in”.  That’s good if you send in your paperwork early because what if everyone goes on vacation and your Form I-407 sits unprocessed until January 2015?

My preference (and I think yours, too) would be get get certainty.  This means showing up at the Embassy or Consulate and handing over the paperwork.  The London Embassy’s summary of what you need to do is pretty good. Sometimes you need an appointment, and sometimes you can just stand in line and hand over your paperwork.  Just be sure it happens before the end of the year.

2.  Tax Consequences of Expatriation

We now assume that you can actually get the job done.  You can abandon your green card or you can renounce your citizenship before December 31, 2014.

That act has (or can have) tax consequences.  You need to know what those consequences are.  Look before you leap, etc.

This thinking process involves two steps:  are you an “expatriate” (meaning that the Section 877A tax rules apply to you), and if you are an expatriate, are you a “covered expatriate”?

a. “Expatriate”?

If you are giving up citizenship, you are a expatriate.  The Section 877A rules (the exit tax rules) will apply to you.

If you are abandoning your green card status, you will be an expatriate if you held the green card long enough.  This requires some individual analysis of your particular situation.  But if you received your green card in 2007 or earlier, you might be an “expatriate” — not counting the possibility that you used an income tax treaty to elect to be a nonresident of the USA for income tax purposes.

b.  “Covered Expatriate”?

You are a covered expatriate or not based on your answers to the questions in Form 8854, Part IV (the bottom part of page 3 of Form 8854).

c.  Your Action Step

Just figure out the answer to the question:  am I a “covered expatriate” or not?  What is your net worth?  How much tax liability did you have over the previous five years?  How are you for the certification test—have you filed tax returns and paid all the tax you are supposed to pay?

3.  Do You Care About the Tax Consequences?

If you are merely an “expatriate”, you have a lot of tax paperwork to do.  If you are a “covered expatriate” you have the possibility of paying some income tax to the United States for the privilege of expatriation.  And you have a problem if your heirs are U.S. citizens—their inheritance from you will be taxed heavily.

You might be willing to accept the tax cost of expatriation in order to renounce citizenship or abandon your green card.  Or there might be no tax cost at all.

Here are some examples where the tax cost is likely to be zero, or you will not care that you are a covered expatriate:

  • Your children or spouse are not U.S. citizens are probably never will be (so there is no punitive tax on gifts or bequests to your children);
  • If you pretend that you sell all of your assets when you expatriate, the total capital gain is under $680,000 (there is no mark-to-market exit tax);
  • You do not have complicated things like IRAs, pensions, etc. hanging around (these are likely to create taxable income for you no matter what else is going on in your financial life).

If the tax cost is zero or close enough for your comfort, you might be willing to renounce citizenship in 2014 and pay whatever it takes to cut off Uncle Sam from continuing to be a part of your life.

Your action step here is to figure out how much money (if any) it will cost you to expatriate, and decide if you are willing to pay that price.  The alternative would be to figure out how to reduce or eliminate the exit tax, and expatriate in 2015.

4.  After Expatriation—The Tax Paperwork

Do you have a plan for dealing with the tax paperwork after you renounce your citizenship or abandon your green card?

At a bare minimum this means you need to know how you are going to file your 2014 income tax return and Form 8854. It also might mean some remedial filings of tax returns or other paperwork for the previous five years (2009-2013).

The choices available to you are (in no particular order):

  • Voluntary Disclosure Program (what a mess that is);
  • Streamlined Procedure (the more the IRS works on this, the worse they make it);
  • Just file your stuff and deal with any audits that come up.

Know how this will work before you commit yourself to expatriation in 2014.  This means you should know the expected financial outcomes of each of the choices and choose the best one.  Choose for certainty first, and cost second.

You might think to yourself “Why should I even file tax stuff?  I gave up my passport and the IRS can’t touch me.”  First off, this is a Thought Crime and the secret police can and will find you.  (Just kidding, but sadly this cliché of science fiction is becoming less and less implausible.)  No, seriously.  You should do the paperwork because your primary purpose in expatriation is to never, ever have to deal with the U.S. government ever again.

Log out of the tax system cleanly, even if it costs you money and time to do so.  You will thank me later.

5.  Make Your Final Decision

Now that you have gone through this decision process, you can go back and decide whether you still want to keep that appointment at the Embassy or Consulate and expatriate in 2014.

Maybe you will decide that it is better to expatriate in 2015 after you have eliminated the uncertainty from your analysis—you know, for instance, that you will definitely not be a covered expatriate.  Or perhaps you will eliminated the  financial cost of the exit tax by re-engineering your financial life to eliminate the net worth test or the net tax liability text as ways to cause you to be a covered expatriate.

Not Legal Advice

This isn’t legal advice to you, of course.  Would you make life-altering decisions based on a random email you got from some guy you found on the internet?  Nope.  Me neither.  Go hire someone.  March through the analysis and figure out what is best for you.

Next Week

Next Tuesday there will be another expatriation-related question and answer. Send yours in. Hit “Reply” and start typing. When you’re done, hit “Send”.