11-Point Checklist For Individuals Expatriating from the U.S.

11 Important Considerations Before Expatriating from the United States

Considerations Before Expatriating from the United States

Expatriation is the process of formally renouncing U.S. citizenship or relinquishing Lawful Permanent Resident status when the U.S. Person is deemed a Long-Term Lawful Permanent Resident (LTR). Once a person formally expatriates, it is very difficult if not impossible to unwind the process since it involves various different tax and immigration requirements. In other words, there is a finality associated with expatriation — which is why taxpayers who are considering expatriating from the United States will want to have their ducks in a row before doing so. Depending on whether the taxpayer qualifies as a U.S. Citizen or LTR will help determine the complexity of their expatriation process. While the tax implications may be similar, the immigration process will be different. Noting, that renouncing U.S. citizenship is much more difficult from an immigration standpoint than simply filing an I-407 and relinquishing a green card. Let’s look at our newly updated 11-point checklist for taxpayers to consider before they expatriate from the United States.

Are You Already a Dual-Citizen?

First, in order to formally expatriate, the United States will require the taxpayer to already have citizenship in another country. That is because the United States government will not approve an expatriation application for taxpayers who would end up being stateless — which means they are not a national of any particular country. For taxpayers who cannot easily obtain citizenship and do not have it already, they may want to consider one of the Citizenship-by-Investment programs.

Do You Have a Foreign Passport?

In addition to obtaining an additional citizenship in order to expatriate, taxpayers need to have a passport from another country as well. Typically, as long as the taxpayer is a citizen of the country they should be able to obtain a passport, although there may be some delay in doing so which is why taxpayers want to plan accordingly.

Are You a Long-Term LPR?

Not all lawful permanent residents are considered expatriates who have to go through the expatriation process. While all U.S. citizens have to go through the process, only lawful permanent residents who qualify as long-term lawful permanent residents have to go through the formal expatriation process. This typically means that they have had their green card for at least eight of the past 15 years, although there are some exceptions, exclusions, and limitations that apply.

Are You Five (5) Years Tax Compliant?

When a person formally expatriates from the United States, one of the forms they have to file with the IRS is Form 8854. In order to sign the form, the taxpayer has to affirm under penalty of perjury that they have been tax-compliant for the past five years. If they are unable to do so, then they will automatically become a covered expatriate.

Are You a Covered Expatriate?

Being a covered expatriate means that the taxpayer may be subject to the exit tax because either they met the net worth test, the net income tax liability test, or are unable to certify under penalty of perjury that they have been tax compliant for five years. While all U.S. citizens and long-term lawful permanent residents may be considered covered expatriates, only covered expatriates may have to pay the exit tax. In other words, taxpayers who expatriate but are not considered covered expatriates do not have to worry about the exit tax — although there is the potential to have to pay a roundabout exit tax for PFIC purposes, based on a recent proposed IRS regulation.

Do You Have Exit Tax?

There are various categories of exit taxes that a taxpayer may have to pay depending on whether they have certain mark-to-market gains, specified tax-deferred accounts, ownership of certain trusts, and ineligible deferred compensation. Taxpayers should plan carefully before filing the paperwork so they are aware of whether they will become subject to exit tax — and can plan accordingly. While the government does provide the taxpayers could apply for a bond in lieu of paying the exit tax, typically these bonds are difficult to obtain and expensive. Thus, based on the interest amounts that are required to hold the bond, it is usually not cost-effective to use the bond.

Do You Plan on Giving Gifts to US Persons?

If a person is considered a covered expatriate and plans on giving gifts to us persons, there is the potential that the US person will have to pay gift or estate tax on the receipt of the gift — upwards of 40%. It is the US person who is required to pay the tax, although foreign tax credits for gift and estate taxes already paid may be applied to reduce or eliminate the tax liability. US taxpayers who receive covered gifts are also required to file an IRS Form 708 although the form 708 is not available to taxpayers just yet.

Do You Plan on Coming Back to the U.S.?

When a taxpayer plans on returning to the United States, they will want to evaluate their options beforehand to determine whether or not they want to obtain one of the different types of visas available to foreigners such as investment visas, treaty visas, student visas, or potential work transfer visas. Even though taxpayers will not be considered permanent residents, they still have to be aware of the substantial presence test and how worldwide income tax applies to taxpayers who meet the substantial presence test.

Do You Have a Post-Expatriation 8854 Requirement?

When taxpayers maintain certain types of deferred compensation and other investments in the United States, they may have to file subsequent Form 8854 in the years after they expatriate. Many taxpayers understandably do not want to continue having to file U.S. tax forms, so they may consider selling their eligible deferred compensation U.S. assets at the time they expatriate — 

Are You Relocating to a Treaty Country?

If a taxpayer relocates to a treaty country, they should be aware that there are certain visas available to taxpayers in treaty countries that may not be available to taxpayers in other countries. Unfortunately, even if a taxpayer is in a treaty country, if they are considered a covered expatriate, they irrevocably waive the ability to claim withholding reduction for certain types of distributions they receive after they expatriate, such as 401K. If they are not considered a covered expatriate, then they can file a W-8 BEN/1040NR and make certain treaty elections to reduce or possibly eliminate withholding.

Will You Maintain U.S. Investments After You Expatriate?

For taxpayers who are maintaining US investments after they expatriate, it is important to note that the tax rules are different for non-US persons than they are for US persons. Certain types of taxes may not apply to income generated from a non-resident alien such as capital gains tax and interest. For income that is generated in the United States that is taxable to the non-resident alien — such as dividend income — it is typically withheld at 30% although by making a treaty election (if applicable) it may serve to reduce or eliminate the withholding requirement.

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