What are the Final Tax Filing Requirements when Expatriating
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The Final Tax Filing Requirements when Expatriating
When either a U.S. Citizen or Long Term Lawful Permanent Resident wants to formally exit the United States and relinquish their Green Card or renounce their US citizenship, they must complete the formalized expatriation process. As part of the process, one of the key issues is making sure that the taxpayer completes their final tax filing requirements. In addition to filing a final tax return, the taxpayer may have some additional forms to file as well such as Form 8854 and a sailing permit. Let’s take an introductory look at the filing when expatriating from the United States.
Date of Expatriation
The date of expatriation may vary depending on whether the taxpayer has to formally renounce their US citizenship at an overseas consulate/embassy or if they are submitting a Form I-407 to USCIS. For illustrative purposes, let’s presume that the date of expatriation is November 1st of the current year.
Dual Status Tax Return
In the year that the taxpayer formally expatriates from the United States, they generally file a dual-status tax return. That is because they will be considered a US person for a portion of the tax year and a non-US person for the other portion of the tax year. How the US government taxes individuals who are considered US Persons is different from how a non-US Person is taxed (resident vs. non-resident tax).
Form 1040 (US Person)
The Form 1040 is filed for the portion of the year that the person is considered to be a US person – which in this example is the first 10 months of the year. Thus, the taxpayer would be required to report their worldwide income on Form 1040 to represent the income earned between January 1st and the expatriation date.
Form 1040NR (Non-US Person)
The Form 1040-NR is required for the portion of the year that the taxpayer is considered to be a non-us person, they are only required to report their US-sourced income for tax purposes. In other words, for the portion of the year that the person is not considered to be a US person, the worldwide income tax rules do not apply to them. Instead, the US can only tax them on their US-sourced income. In this example, the non-resident return is filed for November and December.
Form 8854
For taxpayers who are considered to be U.S. Citizens or Long-Term Residents, they are also required to follow Form 8854, which is the expatriation statement. Depending on whether the taxpayer is a covered expatriate or not will impact the complexity of preparing the form. For taxpayers considered to be covered expatriates, they have to go through all the different categories of assets to determine whether or not they have an exit tax — such as mark-to-market, specified tax-deferred accounts, eligible deferred compensation, ineligible deferred compensation, and trust ownership. The Form 8854 is filed along with the final tax return.
Timing the Final Filing
Referring back to the example above, let’s presume the taxpayer expatriated in November of the current year. The next year, when the taxpayer files the final tax return for the prior year (the dual status tax return explained above), they will also include Form 8854 at that time. Depending on whether they have deferred tax or certain U.S. assets, will dictate whether they are required to file an annual expatriation statement on Form 8854 as well.
Sailing Permit
Some taxpayers may be required to file a sailing permit as well to prove that their taxes have been paid in accordance with U.S. tax laws prior to leaving the United States.
*Taxpayers with U.S.-sourced income may still have a Form 1040-NR requirement. Also, if the Taxpayer travels often to the U.S., they may become subject to the Substantial Presence Test.
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