1.20 Expatriation Tax

U.S. citizens who have renounced their citizenship and long-term U.S. residents who end their residency are considered expatriates subject to special tax rules. You are considered a long-term resident for purposes of these rules if you give up lawful permanent residency (“green card”) after holding it for at least eight of the prior 15 years. Form 8854 must be filed if the expatriation date was on or after June 4, 2004. Individuals who expatriated after June 3, 2004 and before June 17, 2008 are subject to different tax consequences than individuals who expatriate after June 16, 2008.

Law Alert

Proposed Increase in Penalties if Citizenship Renounced for Tax Reasons

Bills have been proposed in Congress to impose a 30% capital gains tax on future investment gains of individuals who renounce their U.S. citizenship to avoid taxes. The proposals would also bar such individuals from re-entering the United States if the required taxes have not been paid. The e-Supplement will have an update, if any, on the proposals.

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Expatriation after June 16, 2008.

If you expatriated after June 16, 2008, you are subject to a “mark-to-market” tax if any of the following is true: (1) your average annual net income tax liability for the five years ending before the date of expatriation exceeds an annual ceiling, which is $151,000 for expatriations occurring in 2012, or (2) your net worth on the date of expatriation was $2 million or more, or (3) you fail to certify on Form 8854 under penalty of perjury that you complied with all U.S. federal tax obligations for the five years preceding the expatriation date.

Under the “mark-to market” tax, you are treated as if you had sold all of your assets for their fair market value on the day before the expatriation date, and any net gain on the deemed sale is taxable for the year of the deemed sale to the extent it exceeds an annual floor, which is $651,000 for expatriations in 2012. Losses are taken into account and the wash sale rules do not apply. An election can be made to defer payment of the tax on the deemed sales until asset is sold (or death, if sooner) provided a bond or other security is provided to the IRS; interest will be charged for the deferral period.

Deferred compensation items and interests in nongrantor trusts are not subject to the mark-to-market tax, but are generally subject to a withholding tax of 30% when distributed to you. IRAs and certain other tax-deferred accounts are treated as if they were completely distributed on the day before the expatriation date, but early distribution penalties do not apply.

See the Form 8854 instructions for further details.

Expatriation after June 3, 2004 and before June 17, 2008.

If you expatriated after June 3, 2004 but before June 17, 2008 and any of the following apply, you are subject to tax on U.S. source income for the following 10 years: (1) your average annual net income tax liability for the five years ending before the date of expatriation exceeds $139,000 if you expatriated in 2008, $136,000 if you expatriated in 2007, $131,000 if you expatriated in 2006, $127,000 if you expatriated in 2005, or $124,000 if you expatriated in 2004, or (2) your net worth on the date of expatriation was $2 million or more, or (3) you fail to certify on Form 8854 under penalty of perjury that you complied with all U.S. federal tax obligations for the five years preceding the expatriation date.

U.S. source income and gains are subject to regular individual tax rates unless the tax would be higher under the 30% tax on investment income not connected with a U.S. business. Form 8854 must be filed for the 10-year period. See the Form 8854 instructions and Publication 519 for further details.