Expatriation Renouncing Your US Citizenship or Green Card
Expatriation is growing at a rapid rate primarily in response to the US government’s increasing number of cumbersome tax laws forcing more expensive compliance, reporting and taxation of its citizens and companies. Historically, the USA has always been a land of immigration rather than emigration. We are now seeing increasing numbers of individuals permanently departing the US.
Recently there have been a number of US corporations merging with foreign corporations often in Ireland or other low corporate tax rate countries. The companies’ objectives are to reduce their exposure to US corporate tax rates which are currently the highest in the world. This technique is called “inversions.”
At the same time with the implementation of FATCA – the Foreign Account Tax Compliance Act – many individuals are either leaving the US or permanently surrendering their US citizenship or residency status. The motivations are many. What we see often are persons that obtained US Green Cards but have moved back to their home country and no longer have substantial ties to the USA. The cost of filing annual US returns combined with the risk of substantial penalties and risk of prosecution if income is not reported correctly, is no longer worth maintaining ties to the USA.
Many such individuals face high levels of income tax by the US on their worldwide income including a top personal tax rate of 39.6%, the net investment income tax of 3.8%, the additional Medicare tax on higher wages of .9%, along with state income taxes that run up to 13%.
Expatriation is a process. It is a complicated process and a difficult personal decision. The 2013 expatriations were about 3,000 reported cases. It is believed these numbers are simply the tip of the iceberg and that many others simply pack up and leave without going through the legal expatriation process. Keep in mind that expatriation is not just a legal process but also a taxable event. IRC Code Section 877A dictates the law as it applies to expatriation.
Expatriation applies not only to citizens but resident aliens. However, those who have maintained a US Green Card for less than eight years may find the expatriation process a bit easier to accomplish. Expatriation – Renouncing US Citizenship or Residency 2 Copyright 2014 by Steven E. Miller, CPA PC
The term “covered expatriate” is very important. Those individuals meeting the definition of a covered expatriate are the ones that must typically pay significant taxes to the US government in exchange for giving up their citizenship. But these are high earning or high net worth persons. For 2014, the two-part covered expatriate test defines someone who either owed $157,000 or more of income tax or had a net worth of $2 million or more.
Another requirement to terminate your citizenship or residency is to sign the Form 8854 certification test certifying you have complied with all US income tax filing requirements over the past five years. Many fail this test due to the extensive and complex foreign income and foreign asset reporting requirements. [FBARs, Form 8938, Form 5471, etc.]
As a covered expatriate, you would be treated as having sold all of your assets [deemed sale – marked to market] on the date of expatriation and paying the tax on those gains. They are taxing your appreciation of your assets. This amount is reduced by an inflation adjusted exclusion amount [$680,000 for 2014]. This exclusion or threshold amount does NOT reduce any funds in retirement accounts such as IRAs or 401ks. There are some limited techniques to defer the payment of tax on certain items.
There are various tax planning opportunities such as those owning a principal residence with substantial appreciation seeking to drop their citizenship. Step up of basis for assets subjected to the tax will avoid future US taxes upon sale.
In summary, the process of expatriation is extremely complex. You may not owe tax upon expatriation if you do not fall under the definition of a “covered expatriate.” Failure to go through the process leaves you legally subject to US income and estate taxation. This may not be what your objective is. Those who continue to own US real estate may fall subject to higher FIRPTA taxes than they would have as US citizens or residents.
Recall the troubles the mayor of London is experiencing as a dual citizen of the US and the United Kingdom. He is apparently a covered expatriate and may face significant tax costs to drop his US citizenship.