If you were a US citizen who has renounced citizenship, or if you are a long term resident of the United States ending your residency status for federal tax purposes, you are subject to the provisions under the Internal Revenue Code section 877A.
Section 877A is basically an exit tax. The provision is set up to tax an individual of moderate wealth or
greater, on their appreciable assets once the individual leaves the Unitized States. Under section 877A, property of the expatriate or long-term resident is valued at mark to market (essentially, fair market value) on the day before exit, and treated as “sold”. All property that is valued and treated as sold is then subject to taxation on the difference of the property’s fair value less the original cost. Any appreciation in excess of $690,000 (as of 2015) will be subject to the exit tax. The tax calculation must be provided on Form 8854. In 2015, you are now provided an option of a tax deferral if you appropriately enter in an agreement with the Internal Revenue Service.
General Rule – Expatriate and long-term residents
According to the Internal Revenue Service, if you expatriated on or after June 17, 2008, the Section 877A expatriation rules apply to you if any of the following statements apply.
- 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 ($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.
If any of these rules apply, you are a “covered expatriate.”
A long-term resident, as defined in IRC 7701(b) (6), ceases to be a lawful permanent resident if:
- the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or
- the individual:
- commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country,
- does not waive the benefits of the treaty applicable to residents of the foreign country, and
- notifies the IRS of such treatment on Forms 8833 and 8854.
Reporting requirements – what needs to be done:
If you meet the definitions and criteria mentioned above in the general rule, or will meet them shortly, your next steps should be as follows:
- File form 8854 Initial and Annual Expatriation Statement with your current year tax return and send a copy of form 8854 to the appropriate address provided in the form’s instructions. Make sure to fill out the appropriate parts based on your date of exit
- Identify the date of relinquishment of citizenship (for former US citizens)
- Determine the date you ended your long-term residency
- Identify all property you owned at date of expatriation
- Calculate the fair market value of all property owned at the date before expatriation
- If you choose to defer tax on your property upon exit, make sure you have appropriately completed all requirements the IRS provides
- Make sure you have all tax liability paid to the IRS prior to exit and that you have it appropriately certified both with records of payments as well as on form 8854. Therefore, any former US citizen or long-term resident should file a form 8854 regardless of whether they would fall under the exit tax regime
Keep in mind that form 8854 might require annual statements and might require notification to Homeland Security. It is important to know the requirements of the exit tax rules and disclosures in order to facilitate smooth transition. Keep in mind that significant penalties of up to $10,000 may be assessed for failure to file form 8854 or to keep up with annual filing requirements.
Contact us today to help you maintain compliance and avoid significant penalties!