Despite the hope that President Trump’s Tax Reform would make it easier for American citizens abroad, over the past 2 months, I have had the task of breaking the bad news. Things have actually got worse. This was my honest message to an audience last Saturday evening at the exclusive City Club at Alphaland – a Private Members Club in the Makati area of Manila. http://www.cityclub.com.ph/
For many overseas employees, who depended on certain itemized deductions like tax preparation fees, unreimbursed business expenses and moving expenses…these are no longer available. More importantly, those hoping for a shift to territorial tax were terribly disappointed. See more here https://www.mooresrowland.tax/2018/01/an-act-to-provide-for-reconciliation.html
For employers or business owners, the ability to defer taxes has been completely removed and business owners are faced with a huge bill for retained earnings. See more here – https://www.mooresrowland.tax/2018/02/us-exposed-owner-of-international.html
So we are seeing a bump in the number of enquiries about giving a US passport or green card. As a citizen, what’s involved? Firstly, you need to have a second passport as you cannot be stateless. Secondly, there’s the immigration side and the tax side and both can be actioned concurrently.
From an immigration standpoint, the first step is going onto the US Embassy website and making an appointment to renounce it. Depending on where you are, some embassies make you return for a second appointment but some are known to accept your US passport during the first interview. Once the expatriation (ie the process of surrendering US citizenship) is complete, the State Department would prepare a Certificate of Loss of Nationality (CLN or form DS-4083) https://en.wikipedia.org/wiki/Certificate_of_Loss_of_Nationality
The tax side of the expatriation process is a bit more detailed. Your tax treatment depends on whether you’re a “covered expat” or not. A covered expat is someone who meets any one of the 3 criteria given under the Heroes Earnings Assistance and Relief Act (HEART Act) passed in June 2008. This applies to individuals who relinquish their US citizenship or long term U.S. residency after June 16, 2008 and who either:
- have an average annual income tax liability of more than $155,000 for the five years preceding expatriation;
- have a net worth equal to or greater than $2,000,000 on the date of expatriation or termination of permanent residency; or
- have failed to provide certified compliance with U.S. tax obligations for the five years prior to expatriation.
An individual who meets one of these criteria is referred to as a “covered expatriate.” If you are not a covered expat, you need only be up to date with all US tax related filings.
The HEART Act imposes a capital gains exit tax (called a “mark-to-market” tax) upon the date of departure. A covered expatriate will be deemed to have sold all his/her worldwide assets at their fair market value on the day before expatriation. Any capital gains on the deemed sale are taxed as income in the year of expatriation. There is an option to defer the tax until the assets are eventually sold, but the expatriate must provide security and pay interest for the period of deferral.
Possible Consequences of Expatriation
Another concern is that after expatriation, the ability to gift or transfer property to a U.S. citizen or resident is greatly limited. A tax of up to 40% is imposed on the recipient of any transfer or gift above the excluded amount of $14,000 per person per year. This can also cause tax problems for U.S. beneficiaries of a trust created by the expatriate.
Expatriates may also run into immigration issues when trying to re-enter the U.S. An amendment to the United States’ Illegal Immigration Reform and Immigrant Responsibility Act of 1996 called the Reed Amendment provides that an expatriate can be permanently refused entry to the U.S. after expatriation if the Attorney General determined that you expatriated for the express purpose of avoiding U.S. tax liability.
Expatriation can be the right option in many situations but, as explained above, comes with serious implications and should not be handled lightly. Please take the time to consult tax and immigration experts before taking the leap on your own.
Please see my previous articles –
- 8854 – Advanced American Tax (htj.tax)
- Americans are giving up their Passports and Green Cards – Advanced American Tax (htj.tax)
- Renouncing US Citizenship if the Individual is a Minor – Advanced American Tax (htj.tax)
Now let’s take a deeper dive into Form 8854 or the Initial and Annual Expatriation Statement
Purpose of Form
Section 877A applies to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated) on or after June 17, 2008.
Form 8884 is used by expatriates to certify compliance with tax obligations in the five years before expatriation and to comply with their initial and annual information reporting obligations under section 6039G.
Individuals who expatriated for immigration purposes after June 3, 2004 and before June 17, 2008, but who have not previously filed a Form 8854, continue to be treated as U.S. citizens or U.S. lawful permanent residents for U.S. income tax purposes until they file a Form 8854. See section 7701(n), as in effect before June 17, 2008.
Individuals in this category are subject to section 877 once they file the Form 8854. These individuals should use the 2018 Form 8854 and the Instructions for Form 8854 (but modify the year on the form by crossing out 2018, and entering the year of actual filing) for purposes of filing their initial and/or annual expatriation statements pursuant to section 877 going forward.
Individuals who expatriated before June 17, 2008, who have previously filed a Form 8854, but who still have an annual reporting requirement in 2020 under section 877 should also use the 2018 Form 8854 but modify the year on the form by crossing out 2018, and entering 2020.
You must file your initial Form 8854 (Parts I and II) if you relinquished your U.S. citizenship in 2020 or you are a long-term resident (LTR), defined below, and terminated your residency status in 2020.
You must file your annual Form 8854 (Parts I and III) if you expatriated before 2020 and you:
- Deferred the payment of tax,
- Have an item of eligible deferred compensation, or
- Have an interest in a nongrantor trust.
Expatriation includes the acts of relinquishing U.S. citizenship and terminating long-term residency.
You are considered to have relinquished your U.S. citizenship on the earliest of the following dates.
- The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).
- The date you furnished to the State Department a signed statement of your voluntary relinquishment of a U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).
- The date the State Department issued a certificate of loss of nationality.
- The date a U.S. court canceled your certificate of naturalization.
Long-term resident defined.
You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends. In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.
You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t 1) commenced to be treated as a resident of a foreign country under the provisions of a tax treaty , 2) waived the benefits of such treaty, and 3) notified the IRS of such a position on a Form 8833 attached to an income tax return. If you were already an LTR at the time you cease to be treated as a lawful permanent resident, then you will be treated as having expatriated as of that date.
If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.
- The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.
- The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).
- The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.
- If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date on which you commenced to be treated as a resident of that country under the treaty, did not waive the benefits of the treaty, and gave notice to the Secretary of such treatment. See Regulations section 301.7701(b)‐7 for information on other filing requirements.
You are a covered expatriate if you expatriated after June 16, 2008, and any of the following statements apply.
- Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.
- $139,000 for 2008.
- $145,000 for 2009.
- $145,000 for 2010.
- $147,000 for 2011.
- $151,000 for 2012.
- $155,000 for 2013.
- $157,000 for 2014.
- $160,000 for 2015.
- $161,000 for 2016.
- $162,000 for 2017.
- $165,000 for 2018.
- $168,000 for 2019.
- $171,000 for 2020.
- Your net worth was $2 million or more on the date of your expatriation.
- You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.
Dual-citizens and certain minors (defined next) won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) above (under Covered expatriate) applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) (under Covered expatriate, earlier).
You can qualify for the exception described above if you meet both of the following requirements.
- You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.
- You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
You can qualify for the exception described above if you meet both of the following requirements.
- You expatriated before you were
- You were a resident of the United States for not more than 10 tax years before the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value (FMV) on the day before your expatriation date (“mark-to-market tax”). This applies to most types of property interests you held on the date of your expatriation. But see Exceptions, later.
Gains from deemed sales are taken into account without regard to other U.S. internal revenue laws. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn’t apply. For 2020, the net gain that you otherwise must include in your income is reduced (but not below zero) by $737,000.
The mark-to-market tax does not apply to the following.
- Eligible deferred compensation items.
- Ineligible deferred compensation items.
- Specified tax deferred accounts.
- Interests in nongrantor trusts.
Instead, item (1) is subject to withholding at source provided that you properly make an irrevocable waiver on your initial filing of this form of any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country and timely notify the payor on Form W-8CE. To timely notify the payor on Form W-8CE, you must file the Form W-8CE with the payor on the earlier of:
- The day prior to the first distribution on or after the expatriation date, or
- 30 days after the expatriation date.
Item (4) is also subject to withholding at source, and you are treated as having waived any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country, unless you elect to be treated as having received the value of your entire interest in the trust by obtaining a ruling from the IRS to that effect. See Section C—Property Owned on Date of Expatriation under Part II.
In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date and you should include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date. In the case of item (3), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date and you should include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date. See paragraphs (d), (e), and (f) of section 877A.
Deferral of the payment of mark-to-market tax.
You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property. If you make this election, the following rules apply.
- You make the election on a property-by-property basis.
- The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.
- Interest is charged for the period the tax is deferred.
- The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates.
- The due date of the return required for the year of death.
- The time that the security provided for the property fails to be adequate. See item (6) below.
- You make the election in Part II, Section D—Deferral of Tax.
- You must provide adequate security (such as a bond).
- You must make an irrevocable waiver of any right under any treaty of the United States that would preclude assessment or collection of any tax imposed by section 877A.
Attach your initial Form 8854 to your income tax return (Form 1040, 1040-SR, or 1040-NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions). Also send a copy of your Form 8854, marked “Copy,” to the address under Where To File, later. If you are not required to file an income tax return, send your Form 8854 to the address under Where To File, later, by the date your Form 1040NR (or Form 1040 or 1040-SR) would have been due (including extensions) if you had been required to file. (See Resident Alien or Nonresident Alien in the Instructions for Form 1040-NR.)
File your annual Form 8854 if you expatriated before 2020 and you:
- Deferred the payment of tax on any property on a Form 8854 filed in a previous year;
- Reported an eligible deferred compensation item on a Form 8854 filed in a previous year; or
- Reported an interest in a nongrantor trust on a Form 8854 filed in a previous year.
See Part III—Annual Expatriation Statement for Persons Who Expatriated After June 16, 2008, and Before January 1, 2020, later.
For each year that you are required to file a Form 1040-NR (or Form 1040 or 1040-SR), attach your annual Form 8854 to your Form 1040-NR (or Form 1040 or 1040-SR) and send a copy, marked “Copy,” to the address under Where To File, later. For each year that you are not required to file Form 1040-NR (or Form 1040 or 1040-SR), send your Form 8854 to the address under Where To File, later, by the date your Form 1040-NR (or Form 1040 or 1040-SR) would have been due (including extensions) if you had been required to file a Form 1040-NR (or Form 1040 or 1040-SR).
- Send your original initial or annual Form 8854 to the address listed below.
- If you are required to attach the original Form 8854 to a Form 1040-NR, Form 1040, or Form 1040-SR send a copy of your initial or annual Form 8854, marked “Copy,” to the address listed below.
- If you elected to defer the payment of any tax due, see the instructions under Part II, Section D, Line 5, later, and send your tax deferral agreement request to the address listed below.
Internal Revenue Service
Philadelphia, PA 19255-0049
Generally, this number is your U.S. social security number. An incorrect or missing identifying number may result in a penalty of $10,000. If you were never issued a social security number, please attach a statement explaining the reason.
This section is to be completed by all filers.
If you have a P.O. box, enter your box number instead of your street address only if your post office does not deliver mail to the street address.
Enter the information in the following order: street address, city, province or state, and country. Follow the country’s practice for entering the postal code. Don’t abbreviate the country name.
Enter the country of which you are considered a resident for tax purposes if it is different from the country in which your principal foreign residence is located.
Check the appropriate box to indicate whether you expatriated in 2020 and are filing your initial expatriation statement, or if you expatriated before 2020 (but after June 16, 2008) and are filing an annual statement.
Your expatriation date is the date you relinquish citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U.S. resident). See Date of relinquishment of U.S. citizenship or Date of termination of long-term residency , earlier.
List all countries (other than the United States) of which you are a citizen and the date on which you became a citizen.
This section must be completed by all individuals who expatriated in 2020.
Check the “Yes” box if you became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.
Check the “Yes” box if:
- You expatriated before you were
- You have been a resident of the United States for not more than 10 tax years before you expatriated. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
Check the “Yes” box if you have complied with your tax obligations for the 5 tax years ending before the date on which you expatriated, including but not limited to, your obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and your obligation to pay all relevant tax liabilities, interest, and penalties. You will be subject to tax under section 877A if you have not complied with these obligations, regardless of whether your average annual income tax liability or net worth exceeds the applicable threshold amounts.
The financial information in this balance sheet is required under section 6039G. The balance sheet can be used to arrive at your net worth.
For purposes of determining your net worth, you are considered to own any interest in property that would be taxable as a gift under Chapter 12 of Subtitle B of the Code had you transferred it immediately prior to expatriation, but without regard to the sections 2503(b) through (g), 2513, 2522, 2523, and 2524. To determine the value of your interests in property, use the valuation principles of section 2512 and the regulations thereunder.
If there have been significant changes in your assets and liabilities for the period that began 5 years before your expatriation and ended on the date that you first filed Form 8854, you must attach a statement explaining the changes.
List in U.S. dollars the FMV (column (a)) and the U.S. adjusted basis (column (b)) of your assets and liabilities as of your expatriation date.
You can use good faith estimates of FMV and basis. Formal appraisals are not required.
List the appropriate amount in each column for all nonmarketable stock and securities issued by foreign corporations that would be controlled foreign corporations if you were still a U.S. citizen or resident. Note that these amounts are already included on line 5. Don’t include amounts on this line in the total on line 20.
List the total value of all your partnership interests. If you hold an interest in one or more partnerships, you must attach a statement to Form 8854 that lists each partnership separately. Include the employer identification number (EIN), if any, for each partnership. Describe the assets and liabilities (using the categories on this balance sheet) from your interest in each partnership.
For purposes of determining your net worth, you are considered to own assets held in trusts that would be subject to U.S. gift tax if you had transferred your interest by gift immediately before your expatriation date, but without regard to sections 2503(b) through (g), 2513, 2522, 2523, and 2524. List the total fair market value and basis of such property on line 9. Attach a statement to Form 8854 describing each asset. Include the EIN (if any) for the trust in which the asset is held.
List the total value of your beneficial interest in a trust. You must attach a statement to Form 8854 that lists each trust separately. Include the EIN (if any) for each trust. Describe the assets and liabilities (using the categories on this balance sheet) from your interest in each trust of which you have a beneficial interest.
To determine the value of your beneficial interest, use the two-step process described in Section III of Notice 97-19.
Intangible property includes any of the following items that have substantial value independent of the services of any individual.
- Patent, invention, formula, process, design, pattern, or know-how.
- Copyright, literary, musical, or artistic composition.
- Trademark, trade name, or brand name.
- Franchise, license, or contract.
- Method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data.
- Any similar item.
Attach a statement describing and listing the total value of any other assets you have that aren’t included on lines 1 through 18.
Combine lines 1 through 5 and 6 through 19, not including any amounts on line 5a. The amounts on line 5a are included in determining the amounts on line 5.
Complete Section C only if you are a covered expatriate (see Covered expatriate, earlier). If you need additional space for the description of property, or if you need additional entry lines, attach a continuation statement.
None of the amounts checked on line 1 are subject to the mark-to-market tax. Don’t include them on line 2. Instead, you must attach a statement to the form that separately identifies each amount checked on line 1 as of the day before your expatriation date.
.Some of these amounts may be otherwise taxable or subject to income tax withholding at source. You must provide Form W-8CE to the payor of the relevant items. See paragraphs (d), (e), and (f) of section 877A for more information..
Generally, a deferred compensation item is one of the following.
- Any interest in a plan or arrangement described in section 219(g)(5). This includes a qualified pension, profit-sharing (including 401(k)), annuity, SEP, and SIMPLE plan.
- Any interest in a foreign pension plan or similar retirement arrangement or program.
- Any item of deferred compensation, whether or not substantially vested. This is any amount of compensation if, under the terms of the plan, contract, or other arrangement providing for such compensation, the following conditions were met.
- You had a legally binding right on your expatriation date to such compensation,
- The compensation has not been actually or constructively received on or before the expatriation date, and
- The compensation is payable on or after the expatriation date.
Examples of items of deferred compensation include: a cash-settled stock appreciation right, a phantom stock arrangement, a cash-settled restricted stock unit, an unfunded and unsecured promise to pay money or other compensation in the future (other than such a promise to transfer property in the future), and an interest in a trust described in section 402(b)(1) or (4) (commonly referred to as a secular trust).
- Any property, or right to property, that you are entitled to receive in connection with the performance of services (whether or not such property or right to property is substantially vested) to the extent not previously taken into account under section 83 or in accordance with section 83. Examples of these items include, but are not limited to, restricted stock, stock-settled stock appreciation rights, and stock-settled restricted stock units.
A deferred compensation item does not include the portion of an item that is attributable to services performed outside the United States while you were not a citizen or resident of the United States. For more information, see section 5 of Notice 2009-85, 2009-45 I.R.B. 598, available at IRS.gov/irb/2009-45_IRB#
Eligible deferred compensation item means any deferred compensation item with respect to which:
- The payor is either a U.S. person or a non-U.S. person who elects to be treated as a U.S. person for purposes of section 877A(d)(1), and
- The covered expatriate notifies the payor of his or her status as a covered expatriate on Form W-8CE, and
- Irrevocably waives any right to claim any withholding reduction on such item under any treaty with the United States on Form 8854.
The Secretary may provide separate guidance providing a procedure for a payor who is a non-U.S. person and wishes to elect to be treated as a U.S. person for purposes of section 877A(d)(1).
.You must file Form 8854 annually to certify that no distributions have been received from your eligible deferred compensation item(s) or to report the distributions you received..
If you have one or more eligible deferred compensation items, you must attach a statement to the form that separately identifies each eligible deferred compensation item and includes the following language for each item: “I irrevocably waive any right to claim any reduction in withholding for this eligible deferred compensation item under any treaty with the United States.”
Ineligible deferred compensation item means any deferred compensation item that is not an eligible deferred compensation item. The amount of this deferred compensation item (the present value of the accrued benefit) must be included on your Form 1040 or 1040-SR, or other schedule, for the portion of your taxable year that includes your expatriation date. For more information, see section 5D of Notice 2009-85, 2009-45 I.R.B. 598, available at IRS.gov/irb/2009-45_IRB#
If you have one or more ineligible deferred compensation item(s), you must attach a statement to the form that separately identifies each ineligible deferred compensation item and provides the present value of such ineligible deferred compensation item as of the day before your expatriation date.
A specified tax deferred account includes:
- An individual retirement plan (except those described in section 408(k) or 408(p)),
- A Coverdell education savings account, or
- A health savings account or an Archer medical savings account.
The amount of your entire interest in your specified tax deferred account on the day before your expatriation date must be included on your Form 1040 or 1040-SR, or other schedule, for the portion of your taxable year that includes your expatriation date. For more information, see section 6 of Notice 2009-85, 2009-45 I.R.B. 598, available at IRS.gov/irb/2009-45_IRB#
If you have one or more specified tax deferred account(s), you must attach a statement to the form that separately identifies each specified tax deferred account and provides the entire account balance of each specified tax deferred account on the day before your expatriation date.
A nongrantor trust is the part of any trust, whether domestic or foreign, of which you were not considered the owner under sections 671 through 679 on the day before your expatriation date. You are considered a beneficiary of such trust if:
- You are entitled or permitted, under the terms of the trust instrument or applicable local law, to receive a direct or indirect distribution of trust income or corpus (including, for example, a distribution in discharge of an obligation);
- You have the power to apply trust income or corpus for your own benefit; or
- You could be paid from the trust income or corpus if the trust or the current interests in the trust were terminated.
Unless you elect to be treated as having received the value of your interest in the trust, as determined for purposes of section 877A, as of the day before your expatriation date, you cannot claim a reduction in withholding on any distribution from the trust under any treaty with the United States. Before you can make the election, you must get a letter ruling from the IRS as to the value, if ascertainable, of your interest in the trust as of the day before the expatriation date by following the procedures set forth in Rev. Proc. 2020-1, 2020-1 I.R.B. 1, available at IRS.gov/irb/2020-01_IRB#RP-
.If you have an interest in a nongrantor trust, you must file Form 8854 annually to certify that no distributions have been received or to report the distributions you received..
If you have an interest in one or more nongrantor trust(s), you must attach a statement to the form that separately identifies each nongrantor trust and includes one of the following statements for each interest.
- “I waive any right to claim any reduction in withholding on any distribution from such trust under any treaty with the United States.”, or
- “I elect under section 877A(f)(4)(B) to be treated as having received the value of my entire interest in the trust (as determined for purposes of section 877A) as of the day before my expatriation date. I attach a copy of my valuation letter ruling issued by the IRS.”