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Highlights
- Expatriation has increased significantly in 2020. The latest
U.S. Department of the Treasury Report reflects that a record 6,047
individuals expatriated during the first three quarters of 2020. In
addition, 834,000 “green card” holders became U.S.
citizens in FY 2019, which reflects an 11-year high. - Why are so many individuals expatriating? Perhaps it is because
we live in chaotic times, ranging from the pandemic to the
contentious presidential election and transition, among other
reasons. Further, U.S. taxpayers increasingly are considering
moving a portion of their financial portfolios offshore for
diversification and to facilitate global trading. - The increase in expatriation also has caught the attention of
the Treasury Inspector General for Tax Administration (TIGTA),
which, in a recent report, emphasized that the Internal Revenue
Service (IRS) should have controls in place to better enforce U.S.
tax and reporting provisions relating to expatriates. - In view of the significant uptick in expatriation activity,
this Holland & Knight article reviews in Q&A format the
essential elements of expatriation from an immigration and tax
perspective.
As discussed in Holland & Knight’s previous alert,
“TIGTA Tasks IRS with Enhanced Enforcement of
Noncompliant Expatriates” (Nov. 23, 2020), expatriation
has increased significantly in 2020. The latest U.S. Department of
the Treasury Report reflects that a record 6,047 individuals
expatriated during the first three quarters of 2020. This compares
to the previous annual record in 2016, when 5,411 individuals
expatriated. Interestingly, going the other way, 834,000
“green card” holders became U.S. citizens in FY 2019,
which reflects an 11-year high in new oaths of citizenship.
The increase in expatriation caught the attention of the
Treasury Inspector General for Tax Administration (TIGTA), which,
in a report issued on Sept. 28, 2020, emphasized that the Internal
Revenue Service (IRS) should have controls in place to better
enforce U.S. tax and reporting provisions relating to
expatriates.
Why are so many individuals expatriating? Perhaps it is because
we live in chaotic times: the pandemic; the economy, social, health
and climate issues; the oppressive worldwide U.S. taxation and
reporting systems and the impact of the U.S. tax rules on so-called
“Accidental Americans”; Foreign Account Tax Compliance
Act (FATCA) and, most recently, the contentious presidential
election and transition.1 Further, U.S. taxpayers
increasingly are considering moving a portion of their financial
portfolios offshore for diversification and to facilitate global
trading.
As a result of the increase in expatriations and TIGTA’s
report admonishing IRS to have better controls and enforcement of
expatriations, in this article we review in Q&A format the
essential elements of expatriation from an immigration and tax
perspective.
I. U.S. Immigration Law Aspects of Terminating U.S.
Citizenship
Q1. How Do I Terminate U.S. Citizenship?
Answer.
- U.S. citizenship can be terminated through several methods,
which include renunciation and relinquishment. This article
considers only the renunciation of U.S. nationality abroad, which
is the most unequivocal way by which an individual can manifest an
intention to relinquish U.S. citizenship. - The renunciation method requires a voluntary choice and an
understanding of the consequences. - Under this method, a U.S. citizen must appear in person before
a U.S. consular or diplomatic officer in a foreign country and sign
an oath of renunciation of U.S. citizenship. - Renunciation must be in person and cannot be done by mail,
electronically or through agents. - A Certificate of Loss of Nationality (CLN) documents the loss
of U.S. nationality. A CLN is completed by a consular official and
sent to the U.S. Department of State for review and approval. U.S.
citizenship is terminated only upon approval of a CLN, which is
retroactive to the date of the oath of renunciation. - Comment. In view of the pandemic, it may not be
possible to quickly or easily schedule an appointment at an embassy
or consulate because of long delays in scheduling appointments, the
closure of some embassies or consulates or because some embassies
or consulates are not handling interviews during the pandemic. As
mentioned above, renunciation must be in person.
Q2. What Are the Consequences of Terminating U.S.
citizenship?
Answer.
- Unless the former citizen possesses a valid foreign nationality
or citizenship, he or she may be rendered stateless, and thus lack
the protection of any government. The lack of a second foreign
nationality or citizenship will also likely lead to difficulty in
traveling as the individual does not have a passport from any
country, and otherwise result in severe hardships. - Thus, prior to renunciation, ensure that
the U.S. citizen lawfully obtained and still retains another
nationality or citizenship. This can be done 1) by reason of birth
outside the U.S., 2) through parents or grandparents (at birth or
later), 3) through naturalization, or 4) through investment. - “Golden Visa” refers to immigration programs of
countries that enable high-net-worth (HNW) individuals to obtain
residence or citizenship in another country simply by purchasing a
house in the country or making a significant investment or
donation. If the immigrant pursues a Golden Visa, he or she must be
careful to obtain what he or she expected. - The Organisation for Economic Co-operation and Development
(OECD), after analyzing more than 100 citizenship or residence by
investment schemes, cautioned that a number of these schemes pose a
high risk to the integrity of the Common Reporting Standard and of
tax abuse.
- “Golden Visa” refers to immigration programs of
- Thus, prior to renunciation, ensure that
- Other Consequences.
- Termination of citizenship is irrevocable once approved, unless
duress or lack of understanding can be proven. - Former U.S. citizens have no right to visit, work or reside in
U.S. and have no advantage over other noncitizens in applying to do
so. - Former U.S. citizens are required to obtain a visa to travel to
the United States or show that they are eligible for admission
pursuant to the terms of the Visa Waiver Program. If unable to
qualify for a visa, a former citizen could be permanently barred
from entering the U.S. - If the U.S. Department of Homeland Security determines that the
renunciation is motivated by tax avoidance purposes, the former
citizen could be found to barred from entry into the United States
through the application of the so-called Reed Amendment, adopted in
1996. - It should be noted that poor drafting and restrictions on IRS
sharing of taxpayer information have blocked implementation, since
no regulations, policy guidance or procedures have been issued to
implement the law. - Nonetheless, a number of former citizens at the border have
been denied entry initially but overcame that denial; others have
been interrogated about their reasons for expatriating. - Note, in June 2013, Sens. Chuck Schumer (D-N.Y.), Jack Reed
(D-R.I.) and Bob Casey (D-Pa.) introduced amendments to the
immigration reform bill to deny entry to “Covered
Expatriates” who expatriated since 2008; these amendments were
never enacted.
- It should be noted that poor drafting and restrictions on IRS
- Termination of citizenship is irrevocable once approved, unless
- Impact on children
- A child who became a U.S.
citizen before the expatriation of a
parent remains a U.S. citizen unless the child was born abroad and
parent’s expatriation was retroactive to a date prior to the
child’s birth. - A child born abroad to a former U.S. citizen does not obtain
U.S. citizenship from the expatriated parent.
- A child who became a U.S.
- Names of expatriates are published in Federal
Register. - Expatriates cannot purchase or possess firearms in the
U.S. - Comments.
- Prior to expatriation, it is important for the expatriating
U.S. citizen to consider options for return to the U.S. in the
future, such as for medical care, for career opportunities, to care
for aging parents, to reside near adult children in old age or for
other reasons. - Ensure expatriating U.S. citizen is not “excludable”
from the U.S.; e.g., criminal convictions, prior immigration
violations, terrorism and medical exclusion grounds (which may
include arrest for driving under the influence of alcohol, even if
not convicted).
- Prior to expatriation, it is important for the expatriating
II. U.S. Tax Law Aspects of Terminating U.S. Citizenship
Q1. Background: Who Is Impacted by the U.S. Expatriation
Law?
Answer.
- Expatriation tax provisions have been in the U.S. Internal
Revenue Code (Code) since 1966. - Until 1996, expatriation tax provisions applied only to U.S.
citizens relinquishing U.S. citizenship. - Beginning in 1996, the U.S. anti-expatriation provisions were
extended to apply not only to U.S. citizens but also to certain
“green card” holders classified as “long-term
residents,” provided such persons are Covered
Expatriates.” See Section III, infra, contains a
discussion of the special expatriation rules applicable to
“green card” holders and planning considerations. - Please note that this article discusses only the Code’s
income and estate and gift tax expatriation provisions applicable
to individuals who are Covered Expatriates and expatriate on or
after June 17, 2008, and not to earlier expatriation
provisions.
Q2. What Does the Term “Expatriate” Mean?
Answer.
- A U.S. citizen who relinquishes citizenship. Also encompassed
within that term, but not discussed herein, is the renunciation of
citizenship and the loss of U.S. citizenship when a U.S. court
cancels a naturalized citizen’s certification of
naturalization. - A “long-term” resident of the U.S., who ceases to be
a lawful permanent resident of the U.S.; see Section III, Q2
below.
Q3. What Are the Principal Code Sections and Precedent Dealing
with Expatriation?
Answer.
- Section 877A. The so-called
“exit” tax, dealing with the income tax consequences to
“Covered Expatriates,” definitions and operating
rules. - Section 2801. Containing the gift and
estate tax consequences applicable to a “Covered
Expatriate.” Proposed Regulations were issued in 2015, more
than seven years after Section 2801 became law. - Section 6039G. Containing the IRS Form
8854 compliance provisions. - Notice 2009-85. Providing guidance for
expatriates under Section 877A.
Q4. Who Is a Covered Expatriate?
Answer.
- A “covered expatriate,” defined in Q2 of this
Section, is someone who meets any of the following three
tests: - The Tax Liability Test. An expatriate who has an average
annual net income tax liability for the five
preceding taxable years ending before the expatriation date that
exceeds a specified amount adjusted for inflation.
For 2020, the amount is $171,000. - The Net Worth Test. An expatriate who has a net worth of
$2 million or more, but not adjusted for inflation as of the
expatriation date. - The Certification Test. An expatriate who fails to certify,
under penalties of perjury, compliance with all
U.S. federal tax obligations for the five taxable years preceding
the taxable year that includes the expatriation date, including,
but not limited to, obligations to file income tax, employment tax,
gift tax and information returns, if applicable, and obligations to
pay all relevant tax liabilities, interest and penalties. This
certification is made on IRS Form 8854 and must be filed by the due
date of the taxpayer’s federal income tax return for the
taxable year that includes the day before the
expatriation.
- The Tax Liability Test. An expatriate who has an average
Comments.
- An individual who otherwise does not meet the Tax Liability
Test or the Net Worth Test nonetheless is a “Covered
Expatriate” if the individual cannot satisfy the Certification
Test. - Note, the certification of U.S. federal income tax obligations
under the Certification Test are those under U.S.C. Title 26
(Internal Revenue Code). - Compliance with Report of Foreign Bank and Financial Accounts,
so-called “FBAR” obligations arise under U.S.C. Title 31
(Money and Finance) and thus are not part of the above U.S.C. Title
26 Certification Test. - If a U.S. citizen or resident alien is not compliant with his
or her other U.S. federal income tax
obligations or FBAR filing obligations, there
are various IRS programs to remediate that non-compliance.
- Exceptions:
- The expatriate became at birth a U.S. citizen and a citizen of
another country and, as of the expatriation date, continues to be a
citizen of, and is taxed as a resident of, such other country, and
has been a U.S. resident for not more than 10 taxable years during
the 15 taxable year period ending with the taxable year during
which the expatriation date occurs; - To come within this foreign residency exception, the individual
must be a resident of the country in which the individual was born
in (and not of another foreign country).
- To come within this foreign residency exception, the individual
- The expatriate became at birth a U.S. citizen and a citizen of
or
- The expatriate relinquishes U.S. citizenship before age
18½ and has been a U.S. resident for not more than 10
taxable years before the date of relinquishment.
- Comment. There are no exceptions to Covered Expatriate
status for long-term residents.
Q5. What Is the Expatriation Date?
Answer.
- It is the date an individual relinquishes U.S. citizenship or,
in the case of a long-term resident of the United States, the date
on which the individual ceases to be a lawful permanent resident of
the U.S. - For a U.S. citizen who renounces U.S. citizenship, the
expatriation date is the date that the individual signs the oath of
renunciation before a diplomatic or consular officer of the U.S.,
provided that the renunciation is subsequently approved by the
issuance of a CLN. - For a long-term resident, the expatriation date is the date of
cessation of lawful permanent residency. That can occur: - through an administrative revocation,
- a judicial determination of abandonment, or
- commencement as a resident of a foreign country under the
provisions of a U.S. bilateral income tax treaty, provided that the
individual waives treaty benefits, and notifies the IRS of such
treatment on IRS Forms 8833 and 8854.
- For a U.S. citizen who renounces U.S. citizenship, the
Q6. Income Tax Expatriation Provision: What Is the So-Called
“Mark-to-Market”/Exit Tax2
Answer.
- General Rule. Section 877A generally imposes a
“mark-to-market” income taxation regime on Covered
Expatriates, which results in the deemed sale of worldwide assets
(except for three categories of assets) on the day before the
expatriation date. The gain is taxed at applicable ordinary or
capital gains rates on gains in excess of $600,000 (indexed for
inflation; $737,000 for 2020). - Operating Rules:
- Any gain arising on the deemed sale is taken into account for
the taxable year of the deemed sale notwithstanding any other Code
provision. - Any loss from the deemed sale is taken into account for the
taxable year to the extent otherwise provided in the Code (except
for the Code wash-sale rules, Section 1091). - All nonrecognition deferral and tax payment extensions are
terminated as of the day before expatriation. - The determination of ownership and valuation of assets is based
on estate tax principles. - An expatriate can elect to defer tax on an asset-by-asset basis
if “adequate security” is provided (with a 30-day cure
period). Deferral continues until asset sold/transferred or
taxpayer dies, if sooner. The taxpayer must agree to waive tax
treaty benefits; and interest accrues on deferred tax at the Code
underpayment rate. - Long-term residents have a basis step-up (but not basis
step-down) for purposes of calculating gain under the
mark-to-market taxing regime. Note, the resident individual may
elect not to have this step-up in basis apply.
- Any gain arising on the deemed sale is taken into account for
Q7. What Assets Are Excluded from the Deemed Sale Rule and How
Are They Taxed?
Answer.
- Deferred Compensation Items. “Deferred Compensation”
is broadly defined to include all types of employer retirement
plans, including qualified, nonqualified retirement plans, as well
as foreign plans and the right to future property transfers that an
individual is entitled to receive in connection with the
performance of services to the extent that amounts were not
previously includible in taxable income. Not included: deferred
compensation attributable to non-U.S. services performed while
taxpayer was not a U.S. resident. Retirement plan payments are
excepted from early distribution penalties. - Taxation.
- “Eligible Deferred Compensation” (i.e., U.S. payor):
subject to 30 percent withholding tax on taxable portion under
Section 871 rules. - “Ineligible Deferred Compensation” (i.e., non-U.S.
payor): present value and includible income on day prior to
expatriation date at marginal tax rates (unless non-U.S. payor
elects to be treated as a U.S. payor).
- “Eligible Deferred Compensation” (i.e., U.S. payor):
- Specified Tax Deferred Accounts. These include the following
types of accounts: - Individual retirement plan (including rollover IRAs).
- Qualified tuition program.
- Coverdell education savings account.
- Health savings account.
- Archer Medical Savings Accounts (MSAs).
- Taxation. On day prior to expatriation date.
- Non-Grantor Trusts. Any trust of which taxpayer is not the
grantor immediately prior to expatriation date. Includes trusts
that are grantor trusts as to other person, Code Section 678. - Taxation.
- Post-expatriation distribution from non-grantor trust in which
taxpayer considered to have beneficial interest prior to
expatriation subject to 30 percent withholding tax on the
“taxable portion” under Section 871 rules; there is no
time limit on the taxation of distributions. - Special Rules.
- Non-grantor trust recognizes gain on distribution of
appreciated property. - Taxpayer deemed to waive any treaty benefits, unless obtains
special IRS ruling to have ascertainable value of beneficial
interest includible in income on day prior to expatriation
date. - If non-grantor trust becomes grantor trust after expatriation,
deemed treatment as taxable distribution. - Potential foreign tax credit issues under Section 906.
- Non-grantor trust recognizes gain on distribution of
- Post-expatriation distribution from non-grantor trust in which
Q8. What Are the Section 877A Compliance
Requirements3
Answer.
- IRS Form 8854 (Initial and Annual
Expatriation Statement). The form must be timely filed with final
income tax return. If it is not, the former citizen is treated as a
Covered Expatriate. Form must be filed also for eligible deferred
compensation items, beneficial interests in non-grantor trusts and
for taxpayers who deferred payment of tax.
On Sept. 6, 2019, the IRS announced a new procedure entitled
“Relief Procedure for Certain Former Citizens,” to enable
certain non-compliant U.S. citizens who relinquish their U.S.
citizenship to become U.S. tax compliant. The procedure has a
narrow scope applicable to non-willful former citizens who owe
$25,000 or less in back taxes and with net assets of less than $2
millio4
- IRS Form W-8CE (Notice of Expatriation
and Waiver of Treaty Benefits) required to be filed in connection
with items excepted from mark-to-market rule, by earlier of first
post expatriation distribution or 30 days after expatriation
date. - Income Tax Returns.
- Year of Expatriation. A Covered Expatriate required to file a
dual-status return if he/she was a U.S. citizen or long-term
resident for only part of the taxable year that includes the day
before the expatriation date. - A dual-status return requires the Covered Expatriate to file an
IRS Form 1040NR (U.S. Nonresident Alien Income Tax Return) with an
IRS Form 1040 (U.S. Individual Income Tax Return) attached as a
schedule. - If the Covered Expatriate’s expatriation date is Jan. 1,
then filer is not required to file a dual-status return.
- A dual-status return requires the Covered Expatriate to file an
- Subsequent Years. If Covered Expatriate does not
have any U.S. source income or it is fully withheld at source,
there is no requirement to file IRS Form 1040NR for that particular
year.
- Year of Expatriation. A Covered Expatriate required to file a
Q9. Estate and Gift Tax Expatriation Provisions: How Do They
Apply5
Answer.
- General Rule. Under Section 2801, U.S.
citizens or residents receiving “covered gifts or covered
bequests” from a Covered Expatriate will be taxed at the
highest applicable gift or estate rate (40 percent in 2020). - “Covered gift or covered bequest.” Property that is
acquired directly or indirectly by gift from, or by reason of the
death of, a person who, at the time of the acquisition or death,
was a Covered Expatriate. - A gift or bequest includes a distribution from the income or
corpus of a foreign trust to a U.S. person attributable to a
“covered gift or covered bequest” made to a foreign
trust. - A “covered gift or covered bequest” to a domestic
trust (a U.S. citizen) is a gift to a U.S. person and taxable to
the trust. Note, an election exists for a foreign trust to elect to
be taxed as a domestic trust. - An issue arises as how the term “U.S. resident” is
defined – whether that term is defined under the domicile
concept of Subtitle B (Estate and Gift Taxes) or the income tax
rules (“substantial presence” and “green card”
tests). - No time limit on the imposition of gift or estate taxes to U.S.
recipients under Section 2801.
- “Covered gift or covered bequest.” Property that is
- Exceptions.
- Amount of annual gift tax exclusion ($15,000), per person.
- Gifts or bequests entitled to marital or charitable
deductions. - A “covered gift “if reported on a timely filed gift
tax return. - Property included in a Covered Expatriate’s gross estate
and reported on a timely filed federal estate tax return. - The U.S. tax on a “covered gift or covered bequest”
is reduced by any foreign gift or estate tax paid on such gift or
bequest.
- Effective Date.
- Notice 2009-85 provided that the reporting and tax obligations
for “covered gifts or covered bequests” received would be
deferred, pending the issuance of guidance. - Proposed Regulations under Section 2801 were issued by IRS on
Sept. 9, 2015 and provided that they would apply on or after the
date of final publication.
- Notice 2009-85 provided that the reporting and tax obligations
- Comment.
- U.S. recipients have the responsibility to determine whether a
gift or bequest received is a “covered gift or covered
bequest” and have the responsibility of paying the tax under
Section 2801. - A U.S. taxpayer may request that the IRS disclose the return of
a donor or decedent expatriate to assist the U.S. person in
determining that person’s tax obligations. If a living
expatriate donor does not authorize the IRS to release his or her
relevant return to a U.S. citizen or resident, a rebuttable
presumption arises to the effect that the expatriate donor is a
Covered Expatriate and that each gift is a “covered
gift.”
- A U.S. taxpayer may request that the IRS disclose the return of
- The Section 2801 tax is not reduced by the gift tax unified
credit or the estate tax unified credit. - There is no correlation between the amount of property subject
to the “exit” tax or whether the “covered gift or
covered bequest” is composed of U.S. or foreign situs
property. - Does Section 2801 override bilateral estate or gift tax
treaties? The Proposed Regulations do not expressly state that
treaties are not overridden, and the legislative history is silent
on this point.
- U.S. recipients have the responsibility to determine whether a
III. Application of U.S. Tax Expatriation Provisions to
“Green Card” Holders
Q1. Who Is a “Green Card” Holder?
Answer.
- The following individuals are deemed to be “green
card” holders: - An alien who has been granted authorization to live and work in
the United States on a permanent basis. A permanent resident card
(“green card”) is issued by the U.S. Citizenship and
Immigration Service after admission and is later mailed to the
alien’s U.S. address. - After entering the U.S. on an immigrant visa, the alien is
granted Permanent or Conditional Resident status. - An individual in possession of a Permanent Resident Card
(I-551), which is proof of lawful permanent resident status in the
United States. The card also serves as a valid identification
document and proof that the alien is eligible to live and work in
the United States.
- An alien who has been granted authorization to live and work in
- Comment. Green card holders need to be aware
that taking a treaty tie-breaker position to file as a nonresident
alien for U.S. income tax purposes could adversely impact their
immigration status and cause an unintended expatriation.
Q2. Who Is a Long-Term Resident?
Answer.
- Any individual (other than a U.S. citizen) who has been a
lawful permanent resident of the United States (a “green
card” holder) in at least eight out of the last 15 taxable
years ending with the year in which the “long-term resident
expatriated” (i.e.,ceases to be treated as a lawful permanent
resident of the United States).
Unlike U.S. citizens, U.S. “green card” holders can
expatriate involuntarily, by having their “green card”
revoked for abandonment, criminal conviction or other deportable
offenses.
- Revocation for Abandonment. A “green card” holder who
takes up residence abroad risks having the green card revoked for
abandonment. This can occur if the “green card” holder is
absent from the U.S. continuously for more than one year or absent
extensively (more than 50 percent) with only short visits to U.S.
Visiting the U.S. once or twice per year, owning a personal
residence or bank/retirement account in U.S. does not protect
against abandonment. - A re-entry permit preserves “green card” status while
residing abroad. - A “treaty tie-breaker” is deemed to have expatriated
as of the date of “commencement” of foreign residence
under a treaty unless the individual waives treaty benefits and
notifies the IRS on IRS Forms 8833 and 8854.
- A re-entry permit preserves “green card” status while
- Relinquishment. A “green card” holder can voluntarily
relinquish his or her “green card” by filing Form I-407
(Record of Abandonment of Lawful Permanent Resident Status) and
avoid coming within the eight out of 15-year test by surrendering
his/her “green card” before the first day of Year
Eight.
Computation Mechanics:
- Determine the 15-year period that ends when the “green
card” is relinquished. - Note, if an individual is a lawful permanent resident of the
U.S. at any time during the calendar year, then that individual is
a lawful permanent resident for that year. For example, arrival in
the U.S. on Dec. 31 counts as a full year as does departure from
the U.S. on Jan. 1. - A “green card” holder that is a lawful permanent
resident for eight out of 15 years is viewed as expatriating for
tax purposes if the individual 1) voluntarily abandons his/her
“green card”; 2) elects to be a resident of a foreign
country under treaty tie-breaker provisions and does not waive
treaty benefits; or 3) the government administratively or
judicially terminates alien’s “green card”
status.
- Determine the 15-year period that ends when the “green
- Tax planning considerations for “green card”
holders: - Leave U.S. and surrender “green card” by filing Form
I-407 before first day of eighth year. - If “green card” holder desires to return to foreign
home for a period of time without jeopardizing “green
card” status, obtain re-entry permit in advance of trip. - If “green card” holder” wants to continue to
reside in U.S. but wants to avoid long-term resident
classification, timely surrender “green card” and obtain
nonimmigrant visa status. - Become a U.S. citizen. A U.S. citizen can reside abroad forever
without losing citizenship.
- Leave U.S. and surrender “green card” by filing Form
- Comment. An alien who is in the U.S. on a nonimmigrant
visa and is a U.S. resident under the “substantial
presence” test cannot become a
long-term resident subject to the U.S. expatriation rules.
IV. Planning Considerations
Q1. What Should You Consider Before Expatriating?
Answer.
- Obtain timely and accurate immigration and tax advice.
- Have a valid second nationality or citizenship.
- Carefully identify ownership and value of all assets and
liabilities. - Consider how property rights impact who owns which assets.
- Pre or post-nuptial agreement?
- Does a common law or community property regime apply?
- Evaluate the cost of Section 877A and Section 2801 taxes
compared to remaining a U.S. taxpayer. - Exit tax – a one-time cost.
- Continuing as a U.S. citizen – incurs lifetime annual
income taxes and potential estate tax at death. - How does expatriation impact multigenerational wealth planning?
This is particularly important if the expatriate’s heirs intend
to remain U.S. citizens.
- If potential expatriate is not in compliance with the
Certification Test, consider how to remediate
non-compliance prior to expatriation
(and concurrently remediate for any non-compliance with
FBARs).
Q2. Some Planning Ideas
Answer.
- Gifting to Reduce Net Worth. Reduce net worth
for purposes of the Net Worth Test, but must be carefully
done. - Consider use of unified credit prior to expatriation since
credit not available post-expatriation. - Consider use of non-grantor irrevocable trusts. Avoid
“string” provisions; e.g., estate tax retained interest
and general power of appointment provisions. - Consider gifts to spouse before
expatriation; viz., use of the unlimited gift
tax marital deduction provided your U.S. citizen spouse is not
expatriating, or gifting to noncitizen spouse (2020 amount is up to
$157,000). - Carefully consider timing of gifts close to expatriation.
- IRS Form 8854 Instructions requires furnishing balance sheet
information “(i)f there have been significant changes in your
assets and liabilities for the period that began 5 years before
your expatriation and ended on the date that you first filed Form
8854, you must attach a statement explaining the
changes.”)
- IRS Form 8854 Instructions requires furnishing balance sheet
- For long-term residents planning to expatriate, consider
possible planning opportunities related to different definition of
resident for income tax purposes versus definition for gift tax
purposes and potential for gifting. - Caveat: This planning idea requires careful evaluation
in the overall context of the immigration and tax provisions
related to expatriation.
- Caveat: This planning idea requires careful evaluation
- Consider use of unified credit prior to expatriation since
- Techniques to Minimize Gain or Income Under Exit
Tax. - Exit tax is based on the fair market value (FMV) of property.
Consider traditional estate planning techniques and vehicles, such
as family limited partnerships, where valuation discounts may be
available. Here, be sensitive to timing. Planning should be done
sufficiently in advance of expatriation. - Sale of Residence. Consider selling residence prior to
expatriation if otherwise qualify for Section 121 exclusion of
$250,000 ($500,000 for certain married taxpayers).
- Exit tax is based on the fair market value (FMV) of property.
Prior to implementing any planning ideas, it is
important to consult with your immigration and tax
advisors.
Conclusion
For more information and questions regarding expatriation from
an immigration and tax perspective, contact the authors.
The authors acknowledge the contribution of Steve Trow,
co-founder and now retired partner of Trow & Rahal, P.C., who
contributed to earlier iterations of some of the content in Section
I of this article.
Footnotes
1 See “Demand for second passports and citizenship
soars,” International Investment, Dec. 1,
2020.
2 See “The Tax Rules Just Changed: Emotions Aside, Does
Expatriating Make Financial Sense?,” Kevin E.
Packman, Journal of Taxation, August
2008.
3 See “The IRS Approach to Dealing with the Expat
Community is Schizophrenic,” Kevin E.
Packman, Estate Planning Journal, January
2020.
4 See Holland & Knight’s previous alert, “New IRS Procedure Provides Favorable Path for
Non-Compliant Expatriates to Become Tax Compliant,” Sept.
11, 2019.
5 See “IRS Provides Some Guidance on the New Expatriation
Exit Tax,” Kevin E. Packman and Summer A.
LePree, Journal of Taxation, March 2010.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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