The process of renouncing U.S. citizenship or terminating long-term residency is known as expatriation. One of the main reasons for expatriation is from increased tax burden and tax reporting requirements that U.S. persons living outside of the United States are faced with. The expatriation process is not that easy. Along with various legal formalities, Form 8854, Initial and Annual Expatriation Statement is required to be filed. It is important to be informed about Form 8854 as failure to file the form could cause expatriates to be subject to U.S. taxes and lead to significant penalties.
A.G. Tax U.S.-Canada cross-border tax professionals have seen an increase in the number of Americans considering relocating to Canada, requesting consultations about the expatriation process and tax filing requirements. As a result, we thought an article on the subject would be beneficial for individuals seeking information on expatriation, therefore, we have provided a brief summary on expatriation and Form 8854, Initial and Annual Expatriation Statement filing process and requirement.
U.S. Expatriation and Expatriation Tax
When individuals expatriate, the U.S. imposes special exit taxes. These taxes apply to U.S. citizens and long-term residents who give up their U.S. status. A long term resident is a person who was a lawful permanent resident (green-card holder) for a minimum of eight out of the last 15 tax years.
An individual, who is expatriating, is required to comply with certain tax formalities, such as: filing Form 8854, filing a final Form 1040, obtaining a certificate of compliance, etc.
The date of expatriation for a U.S. citizen is the earliest of :
- When the U.S. citizen taxpayer renounces citizenship before a U.S. diplomatic or consular officer which is later confirmed by the issuance of a loss of nationality certificate
- The date when a signed statement of voluntary relinquishment of U.S. nationality was furnished to the State Department confirming expatriation
- The date that the State Department issues the loss of nationality certificate
- The date that a US court cancels a certificate of naturalization
For lawful permanent residents, the expatriation date is the earliest of:
- The date the individual voluntarily abandoned lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer
- The date the individual became subject to a final administrative order that states the individual has abandoned lawful permanent resident status
- The date the individual was subject to a final administrative or judicial order for removal from the United States under the Immigration and Nationality Act
If a dual resident of the United States and a country with which the United States has an income tax treaty, the date the taxpayer commenced to be treated as a resident of that country and determined that, for purposes of the treaty, the individual was a resident of the treaty country and filed a Form 8833 attached to a timely filed income tax return.
Expatriation for tax purposes differs
The date of tax expatriation is the later of the date the individual notified the relevant agency of the expatriating act or the date Form 8854 was first filed. As a result, it is very important to file Form 8854 with a timely filed final U.S. 1040 tax return. Expatriation for immigration purposes does not relieve an individual of the obligation to file U.S. tax returns and report worldwide income as a citizen or resident of the United States until the individual files Form 8854.
The expatriation taxation rules were added in 2004 and subsequently changed in 2008. Any individual who has expatriated from the U.S. on or after June 4, 2004 is required to file Form 8854, Initial and Annual Expatriation Statement along with their final Form 1040, Individual Income Tax Return. This is to notify the IRS that the taxpayer has officially renounced their citizenship or terminated their long-term residency and complied with all tax filing requirements.
Depending upon the expatriation date, the expatriate will be subject to tax rules either under Internal Revenue Code (IRC) section 877 or section 877A.
If an individual expatriated after June 3, 2004 and before June 17, 2008, the expatriate may be subject to taxation as per IRC Section 877.
Under §877, an individual is no longer taxed as a U.S. citizen or resident on their worldwide income. They would be subject to tax as non-resident taxpayers on U.S. income subject to certain rules for ten years after expatriation under an alternative tax regime. In addition, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.
These expatriates are subject to annual information reporting for each taxable year during which such an individual is subject to the rules of IRC 877. Form 8854 is due on the date that the individual’s U.S. income tax return for the taxable year is due or would be due if such a return were required to be filed.
Additionally, special gift and estate tax rules apply to expatriates under §877 which differ from the general U.S. estate tax rules for nonresident aliens.
If expatriation is after June 16, 2008, and the expatriate is considered a ‘Covered Expatriate’ they will be subject to taxation as per IRC Section 877A.
An individual is considered a “covered expatriate” if any ONE of the following is true:
- Average annual net income tax liability for the 5 tax years before the date of expatriation is more than:
– $139,000 in 2008
– $145,000 in 2009
– $145,000 in 2010
– $147,000 in 2011
– $151,000 in 2012
– $155,000 in 2013
– $157,000 in 2014
– $160,000 in 2015
– $161,000 in 2016
– $162,000 in 2017
- Net worth is $2 million or more on the date of expatriation.
- The individual fails to certify on Form 8854 that all federal tax obligations for the 5 tax years preceding the date of expatriation have been complied with.
Certain exceptions apply to minors and individuals who are born as dual-citizens.
If a person is considered to be a ‘Covered Expatriate’ they will be subject to two special tax regimes. Firstly, they will be subject to exit tax. Under this regime, an individual is taxable on any gains from properties they own as if the property had been sold at the prevailing fair market value (FMV) on the day before expatriation. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. For 2017, the net gain may be reduced by $699,000 but not below zero.
In addition, ‘covered expatriates’ are subject to alternate exit tax. Under this regime, the expatriate is treated as receiving accrued benefits from certain deferred compensation plans or a distribution of the entire interest in a tax deferred account as of the day before the expatriation date and must include this amount in income on the final Form 1040. This would include income from certain retirement plans, RRSP’s, IRA’s, HSA’s, etc.
If expatriation took place before the current year, and the individual deferred the payment of tax, has an item of eligible deferred compensation, or an interest in a non-grantor’s trust there may be a requirement to File Form 8854 annually.
Form 8854, Initial and Annual Expatriation Statement
Form 8854 has various sections/parts, which need to be filed/completed depending upon the date of expatriation.
- Part I — General Information: This section is to be completed by all filers.
- Part II—For persons who expatriated after June 3, 2004, and before June 17, 2008
- Part III—For persons who expatriated after June 16, 2008, and before January 1 of the taxation year
- Part IV—For persons who expatriated during the taxation year.
- Part V – For persons who expatriated after June 3, 2004, and before June 17, 2008, and for those who expatriated during the taxation year.
The initial Form 8854 should be filed along with the final income tax return (Form 1040/1040NR) by the due date of the return.
Another copy of the Form 8854 needs to forwarded to the IRS office in Philadelphia. If an annual Form 8854 is required it should be attached to the Form 1040NR with a copy sent to the Philadephia office.
If no Form 1040/1040NR etc. is required, the expatriate may simply send the annual Form 8854 to the IRS by the date the taxpayer would have been required to file a return.
In summary, taxpayers should be informed this is an overview of the expatriation law. Special rules apply in the case of minors and dual citizens (which have not been discussed in the article). If an individual is considering expatriation, it is highly recommended that he/she consult a tax professional for advice based on their own personal tax situation.
AG Tax LLP Can Help
If you have any Form 8854 or other tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement Planning
- Estate Planning, Inheritance tax advice
Please contact either of our offices in Canada at 604-538-8735 (Greater Vancouver), or 780-702-2732 (Edmonton and Alberta) to arrange for an appointment to discuss your tax related queries.
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.