In the past few years, there has been an upsurge in US citizenship renunciations. In a recent Forbes article[i], between 2005 and 2009, less than 2,500 people renounced their citizenship. Between 2010 and 2020, this number went up to 36,840. The reasons behind such renunciations could be political or personal and irrespective of the reasons there are complicated paper work to complete their renunciation.
In this article will briefly take a look at Form 8854 and some of its elements. Form 8854 is a complex tax form US citizens and a green card holders may have to complete and file with their final US tax return (i.e. year of termination of US citizenship/residency) in order to properly complete and close their US citizenship relinquishment. Due to the complexity of the rules, there are common misunderstanding.
What is Form 8854 and who has to file? – Form 8854 otherwise known as Initial and Annual Expatriation Statement is a form which applies to US citizens who have relinquished their US citizenship or long-term residence who have ended their residency (expatriated) under § 877A. One is considered a long-term resident of the US if they have been a permanent and lawful resident of the US for 8 of the past 15 tax years ending with the year one is no longer treated as a lawful permanent resident. However, it shall exclude any years where one has been treated as a resident of foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.
What is expatriation?– Expatriation includes the acts of relinquishing US citizenship and terminating long-term residency.
What is this Form used for? – The form is used by expatriates to certify compliance with tax obligations in the 5 years before expatriation and to comply with their initial and annual information reporting obligations to show that you are or not a covered expatriate.
Who is a covered expatriate (based on current rules)? – One is a covered expatriate if any of the following statements apply:
- average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $178,000 (2022).
- net worth was $2 million or more on the date of expatriation.
- fail to certify on Form 8854 that one has complied with all federal tax obligations for the 5 tax years preceding the date of expatriation.
What if I am a covered expatriate? – A covered expatriate has to pay an exit tax in the US on assets at the rate that was applicable the day before expatriation date. This mark-to-market regime generally means there is a deemed sale of all the property of a covered expatriate on the day before the expatriation date.
What if I fail to file Form 8854? – IRS can be unforgiving when it comes to penalties for noncompliance acts. The noncompliance penalty for this form is $10,000 unless it is shown that such failure is due to reasonable cause and not wilful neglect. Beyond this, one will be considered a US citizen until Form 8854 has been filed, and may continue to be subject to US taxes. Thus, it is always better to seek professional legal and tax advice when going through US citizenship or long-term residency renunciation.
Please consult us if you have any questions regarding the tax implication of the expatriation process.
Disclaimer: This information has been prepared for informational purposes only, and is not
intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this article was intended to be general in nature.