February 11, 2014
In light of all the commotion regarding FATCA and the obligation that all US citizens have to report and pay taxes on their worldwide income regardless of where they live, some people are considering giving up their US citizenship claiming that is it more of a burden than a prerogative. This act is called expatriation which is defined by the IRS as an act of relinquishing U.S. citizenship and/or terminating long-term residency.
It is important to note that you are considered to have relinquished your U.S. citizenship on the earliest of the following dates.
1. The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States.
2. The date you furnished to the U.S. State Department a signed statement of your voluntary relinquishment of U.S. nationality confirming the performance of an expatriating act.
3. The date the State Department issued a certificate of loss of nationality.
4. The date a U.S. court canceled your certificate of naturalization.
Some people are not considered U.S. citizens but Long Term Residents (LTR):
You are a LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends. In determining if you meet the 8-year requirement, the year that you were treated as a resident of a foreign country under a tax treaty is not counted.
As a LTR, you are considered to have terminated your lawful permanent residency on the earliest of the following dates.
1. The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.
2. The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order.
3. If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of State of such treatment.
All this is good and well for immigration purposes but until you file Form 8854 and notify the Department of State or the Department of Homeland Security of your expatriating act, your expatriation for immigration purposes does not relieve you of your obligation to file U.S. tax returns and report your worldwide income as a citizen or resident of the United States.
This means that although you have committed an expatriation act as defined above, you will still be subject to U.S. taxes as an American, from the IRS point of view, simply because you have not filed form 8854 and paid an "exit tax" if applicable.
You must file Form 8854 to either establish that you have expatriated for tax purposes, or to comply with the annual information reporting requirements, if you are subject to tax because you are either a former U.S. citizen or a former LTR and any one of the following applies to you:
a. Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation exceeds a certain amount which is always adjusted yearly for inflation. For 2013 the amount is $155,000.
b. Your net worth is $2 million or more on the date of your expatriation.
c. You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation
If the above applies to you, you will be subject to income tax on the net unrealized gain of all your assets including all properties you own, as if they have all been sold for their fair market value on the day before your expatriation date. This is basically the "exit tax" you pay in order to finalize your expatriation for tax purposes.
When to File:
You must file your initial Form 8854 as soon as possible after the date you relinquish U.S. citizenship or terminate your long-term residence. You remain subject to tax as a U.S. citizen or resident until you both file your initial Form 8854 and notify the appropriate authorities of your expatriating act. In most cases, you must file your annual Form 8854 by the due date for filing Form 1040NR, U.S. Nonresident Alien Income Tax Return, regardless of whether you are required to file Form 1040NR.
The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances.
Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Tel-Aviv and New York and affiliate offices in Greater China, London and Amsterdam.