If you no longer live in the United States, then you’ve probably wondered why you are continuing to file US tax returns every year. US citizens or Green Card Holders are taxed annually on their worldwide income and gains and have an ongoing obligation to file US federal tax returns, even if they earn less than the relevant exclusions and there is no tax due. With the ever-increasing list of confusing and complex IRS regulations, more and more citizens are being stung with unexpected tax bills and surcharges. If you’re one of those individuals, then you’ve probably thought about throwing in the towel, renouncing your US citizenship or giving up your Green Card and emancipating yourself. I am sorry to say, as with everything to do with US tax, its not that simple.

Expatriation Tax

The IRS don’t like to lose taxpayers so, as a parting gift, certain individuals are required to pay an exit tax when they renounce their citizenship or give up their Green Card. This tax only applies to US citizens and Long-Term Residents who are considered as Covered Expatriates.

Long Term Residents are individuals who have held a Green Card (lawful permanent residency) for 8 of the previous 15 years (ending on the date of expatriation). If you have been a Green Card Holder for less than 8 years, then you are able to expatriate with little or no fuss (as long as you are up to date with your filing obligations).

You are considered as a Covered Expatriate if:

  • Your average net tax liability over the previous 5 tax years is above certain thresholds – the threshold for 2018 is $165,000. The majority of US taxpayers living outside of the US are unlikely to be caught by this due to exclusions and credits available to residents of foreign countries.
  • Your net worth is greater than $2 million on the date of expatriation – this is your worldwide assets and includes any cash and the fair market value of all securities, property, pensions, trusts, i.e. anything with value, and converted to US Dollars. This is reduced by any liabilities, for example mortgages and other debts.
  • You have failed to comply with all your filing obligations for the previous 5 tax years.

The Exit Tax is income tax calculated on the net gain from the deemed sale (or distribution) of your worldwide assets on the day before the date of expatriation. But it’s not all doom and gloom, there is a $711,000 exemption (for 2018) available to reduce your taxable gain. For most covered expatriates this is probably enough to reduce your taxable gain to zero, but for the lucky (or unlucky) few with multiple properties and a high net worth, there will probably be some tax to pay.

This all sounds fairly straightforward but be warned, there are further complications with the involvement of foreign and domestic deferred compensation schemes, pensions and trusts.

The Exceptions

If you were a dual citizen at birth where one country is the United States – for example, you were born in the UK to US parents – and you are a resident of the other foreign country on the date of expatriation then you will be exempt from being a covered expatriate, subject to a few residency requirements.

Also, certain minors (under the age of 18.5 on the date of expatriation) are exempt from expatriation tax, again subject to a few residency requirements.

For these exceptions to apply, you must be up to date with your US tax return filing obligations.

The Process

So, you’ve thought about it long and hard, you’ve done the maths. You’ve worked out that you’re not a covered expatriate or you’re happy to pay the tax bill. You’ve spoken to a lawyer about any possible repercussion and you’ve made your mind up. You’re going to expatriate! You should be aware that the process is slightly different for Citizens and Green Card Holders.

  • As a Citizen you will need to book an appointment at the US Embassy and make a formal renunciation of your citizenship in front of the US flag. The day you do this is usually considered as your date of expatriation. You should make sure you have a passport with another country before doing this.
  • It’s a little simpler for Green Card holders, they just need to complete Form I-407 and submit this to the IRS. This is usually their date of expatriation unless they have claimed to be a resident of a foreign country under a tax treaty on Form 8833 submitted with their tax return.

It is important to note that an expired Green Card does not stop your tax return filing obligations. You will need to continue filing until you formally terminate your long-term residency on Form I-407.

Why retain your citizenship or Green Card?

This question is better aimed at an immigration lawyer. From a tax perspective, if you can avoid the exit tax, then there aren’t many positives to maintaining your US taxpayer status. But tax isn’t the answer to everything, for example the US has a lot of VISA-free travel with other countries that may be useful for an internationally mobile employee. Another reason may be that you want to return to live or work in the US at a later date. Regaining a Green Card can be problematic if you have renounced it previously.

This is a complex area and we will always recommend speaking with us directly or to an immigration lawyer for specific advice on your situation. With planning you can mitigate the tax issues with elections, structured gifts and timely filed returns.

The above article should not be taken as tax advice.