Prior to the US Presidential election we heard comments first hand and in the press from US citizens and green card holders that they may consider expatriation after the election results.
Following this morning’s news some of those US connected persons may now be considering renouncing their US citizenship or relinquishing their US green cards.
This is a very personal decision to take and one which should never be taken lightly, however for those whose minds are made up we can certainly assist with this process.
For those who are considering expatriation we have detailed the steps to do this below.
This is of course only a brief guide and there may be many other factors that you may want to give thought depending on your personal circumstances to such as:
• What will be the impact on other members of my family who are US citizens and intend to remain so.
• Do you have US assets that you intend to retain after expatriation. Will you still be required to file returns in the US after expatriation.
• Are you a covered expatriate (more details below).
• Do you intend to gift cash or assets to your US citizen family members in the future.
• Do you need to consider the impact on future inheritance issues on your passing?
• Do you need to consider tax planning for your whole family?
We have extensive experience in all of the issues mentioned above and in assisting client relinquishing their citizenship and US green cards. Should you need to discuss this in more detail and in confidence please do not hesitate to contact us.
Step One: Are you up to date with your US tax returns?
In order to expatriate you are required to declare that you are up to date with the past 5 years US income tax returns. If you were not aware, American citizens and Green Card holders (GCHs) must file tax returns and complete additional financial reporting in the US regardless of where they are resident. If you are not compliant with all of these requirements The IRS does offer two disclosure options that can be used to bring your US tax affairs up to date. This usually requires filing at least the past 3 years returns, you may file more if you need to expatriate quickly.
Do not forget your FBAR. This is required if the aggregate maximum balance of your non US bank accounts exceeded $10,000 at any time during the year. While this filing is purely informational it should not be overlooked as the penalties for failure to file can be up to 50% of the maximum value of the account for each year. If you have not done these for a number of years you may be required to go back and file the past 6 years. These can be submitted as a part of the disclosure process along with the income tax returns.
Every year we have assisted our clients in getting back up to date with their US tax filing requirements via the disclosure options provided by the IRS. We provide a quick and easy to understand service and can get you back into compliance in a matter of weeks in some cases, regardless of how long it has been since you last filed a return.
Step Two: Will you be subject to Expatriation Tax?
Prior to expatriation you should also consider if you are a ‘covered expatriate’ for US Expatriation tax purposes. You are considered a covered expatriate if you are a long term green card holder (held for more than eight years) or US citizen and:
• Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, and $160,000 for 2015).
• Your net worth is $2 million or more on the date of your expatriation or termination of residency.
• You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
For those that are covered expatriates the IRS imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the tax year of the deemed sale
If you are a covered expatriate you should seek advice prior to taking step 3 below. We have experience in assisting clients in managing their affairs and in some cases assisting with pre expatriation planning to ensure that they are not covered expatriates and therefore not subject to expatriation tax on renouncing their citizenship.
For those that have held their green cards for less than eight years the tests above and expatriation tax may not apply. Also any US citizens who were born with dual citizenship may also not be subject to the tests above and expatriation taxation.
Step Three: Review the required forms for relinquishing your citizenship:
The practical process of relinquishing your citizenship does require you to attend an interview, for those living overseas this will usually be at the US embassy with a consular representative. Prior to the appointment you will need to gather a number of documents and complete various forms including:
1. Evidence of U.S. citizenship; (such as your most recent U.S. passport or U.S. birth certificate, if you are not in possession of your U.S. passport;
2. Bio-pages of all current foreign passports;
3. Certificates of Naturalization for any country.
4. Certificates of Citizenship for any country.
5. Evidence of any name changes.
6. Completed form DS-4079
7. Completed Loss of Citizenship Questionnaire
8. Completed Informal Loss of Citizenship Acknowledgement.
Step Four – Submit your final US tax returns:
Your last US tax return covers the period from January 1 through to the date of your expatriation. As you will not be a US resident from the date of renunciation you will be required to submit both a form 1040 and form 1040NR. Alongside hose two forms you will also be required to submit form 8854, Initial and Annual Expatriation Statement.
The form 8854 is for the most part aimed at covered expatriates but is usually completed by all those renouncing their citizenship or US Green cards. This can be a complex form particularly for covered expatriates. We would recommend that you speak with an advisor here at Tax Advisory Partnership when completing this form.
As discussed at the start of this article, there may be a number of issues that you need to give thought to before starting on the journey to renouncing your citizenship or US Green card. Considered and careful planning can save both you and your family from further issues in the process of renouncing your citizenship and in some cases later in life as assets are inherited by or gifted to future generations.
We have extensive experience in assisting our clients with planning for expatriation and completing the final expatriation processes.
Please contact us if you are considering renouncing your citizenship so we can discuss how you can effectively plan for this.
All views and opinions expressed in the blogs are personal to the writer and may not necessarily be shared by everyone at TAP but our clients are always welcome to put forward alternative views and questions which we will endeavour to share via future blogs, where appropriate.