When Americans hear the term “expatriation,” they often think of renouncing U.S. citizenship. However, for U.S. tax purposes, expatriation also applies to long-term residents (green card holders) who surrender the green card after holding it for at least 8 of the past 15 tax years. A tax year is shorter than a calendar year and the green card holder will typically have a separate tax year at 2 events – when obtaining the card and when giving it up. As a result, it is easy to reach the 8-year mark.
For both groups, leaving the U.S. tax system can come with significant tax and reporting obligations. This is especially so if they qualify as “covered expatriates.”
Expatriation Numbers Keep Rising
Expatriation numbers have continued rising significantly in recent years, reflecting a growing trend among U.S. citizens and green card holders seeking to sever ties with the U.S. tax system. The Federal Register publishes the names of expatriates quarterly, and recent data shows record highs. For example, over 4,000 expatriations were reported for the three quarters of 2024 alone, continuing a pattern of sharp increases.
The rise is driven by several factors, including:
- Global Mobility: More individuals are living internationally, making dual taxation burdens more apparent.
- U.S. Tax Complexity: The Foreign Account Tax Compliance Act and related reporting requirements have increased compliance burdens and scrutiny for Americans overseas.
- Cost of Compliance: Maintaining tax compliance while abroad can be costly and complicated, especially for those with foreign financial accounts, businesses, or investments.
- Exit Tax Planning: Wealthier individuals are pre-emptively expatriating to avoid potentially stricter tax rules in the future.
Who Is A Covered Expatriate?
A covered expatriate is an individual who meets any one of three tests:
- Net Worth Test: Having a net worth of $2 million or more on the expatriation date (this number is not indexed for inflation).
- Tax Liability Test: An average annual net income tax liability exceeding $206,000 (for 2025, adjusted annually for inflation) over the five years before expatriation.
- Certification Test: Failing to certify full U.S. tax compliance for the five years preceding expatriation.
Covered expatriates face unique challenges, including a potential exit tax. This tax treats their worldwide assets as if sold on the day before expatriation, with the “pretend” gains above a certain threshold subject to U.S. income tax. Additionally, gifts or bequests from covered expatriates to U.S. persons are taxed to the U.S. recipient at the top gift or estate tax rate (currently 40%) on the value of what they received. It does not matter that the gift or bequest was transferred many years after the expatriation, or that the subject matter involved funds or assets acquired by the expatriate well after expatriating.
New Focus On Intent With Revised Form DS-4079
The U.S. Department of State has recently revised Form DS-4079, the “Request for Determination of Possible Loss of U.S. Citizenship.” Effective November 1, 2024, the updated form probes more deeply into the expatriate’s intent during acts leading to potential loss of citizenship, such as acquiring foreign nationality or serving in a foreign government.
This change reflects growing governmental scrutiny over whether the expatriating act was voluntary and with the intent to relinquish citizenship. The tailored sections seek to clarify whether an individual unintentionally retained U.S. citizenship despite engaging in potentially expatriating acts.
IRS Draft Expatriation Form 8854: New Focus On Asset and Liability Changes
The Internal Revenue Service has also proposed revisions to Form 8854, the “Initial and Annual Expatriation Statement.” A new Question 3 requires expatriates to disclose any significant changes in their assets or liabilities during the five years before expatriation. The question and accompanying instructions make clear that if the taxpayer’s net worth exceeded $2 million at any point during the five years before expatriation but fell below $2 million on the expatriation this is considered a significant change.
This addition may help the IRS identify pre-expatriation strategies used to reduce net worth or shield assets from the exit tax. This would include the popular method to reduce net worth by gifting assets. Gifts that reduce net worth below the $2 million threshold may be viewed as a deliberate action to avoid covered expatriate status and the associated tax consequences.
The draft IRS form requires a detailed explanation of how net worth was affected by mandating an explanatory statement be attached to Form 8854. This scrutiny highlights the IRS concern about potential strategies to minimize tax liability prior to expatriation. An example of a mother gifting to her son is used in the draft instructions. No doubt, the government is looking very closely.
Expatriation Garnering Increased Government Examination
The rise in expatriation numbers has not gone unnoticed by the U.S. government. With more individuals renouncing citizenship or relinquishing green cards, the government is actively working to ensure that no tax liabilities are overlooked. This continues a trend that has been ongoing for some years.
In July 2019 the IRS launched a compliance “campaign” targeting expatriation issues with an audit focus on those expatriating. The trend for heightened governmental surveillance of expatriations is underscored by both the State Department’s updates to DS-4079 and the IRS draft revisions to Form 8854. These changes align with broader efforts to close perceived loopholes, ensure compliance, and capture tax revenue.
Conclusion
Heightened governmental focus underscores the importance of careful pre-expatriation planning. Expatriating U.S. citizens and green card holders must tread cautiously. Incomplete disclosures or non-compliance can lead to penalties, exit tax assessments, covered expatriate status and even possible barred re-entry to the U.S. for tax avoidance motives.
Given the complexity and high stakes, individuals considering expatriation must seek professional guidance to navigate evolving regulations and ensure compliance. It is imperative to use a tax professional with the proper experience in this complex area. A bargain price today for help with expatriation may not be a bargain at the end of the day.
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