Giving Up U.S. Citizenship or Long Term Residency

By | March 5, 2015

A U.S. citizen who gives up U.S. citizenship or a long-term U.S. resident who gives up his residency status and who is a covered expatriate is subject to a mark-to-market rule under which his property is deemed to be sold on the day before the expatriation and he is taxed on the gain in excess of an inflation adjusted amount of $680,000 for 2014 ($668,000 for 2013).


Who is a Covered Expatriate?

A covered expatriate is any U.S. citizen who relinquishes citizenship, or any long-term U.S. resident who ceases to be a lawful permanent resident of the U.S, who meets one of the following tests:

(1) the individual’s average annual net income tax for the period of 5 tax years ending before the date U.S. citizenship or residency is lost is greater than an inflation adjusted amount that is $157,000 for 2014 ($155,000 for 2013),

(2) the net worth of the individual as of the date U.S. citizenship or residency is lost is $2,000,000 or more, or

(3) the individual fails to certify under penalty of perjury that he has met the requirements of the U.S. tax code for the 5 preceding tax years or fails to submit whatever evidence of his compliance that IRS requires.

All the property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value. Any gain on the deemed sale is recognized notwithstanding any other nonrecognition rules and is taken into account for the tax year of the deemed sale, but losses may not be recognized if they would otherwise not be recognized. The basis of the assets will be adjusted by the amount of gain or loss taken into account.


Consequences of being Covered Expatriate

A covered expatriate may make an election to defer the payment of tax attributable to any property that is deemed sold under the mark-to-market rule. A tax deferred under these rules bears interest from the due date of the taxpayer’s return for the expatriation year and is permitted only if the expatriate provides adequate security.

Deferred compensation items of a covered expatriate are subject to special rules. Eligible deferred compensation is subject to 30% withholding. The present value of deferred compensation that is not eligible deferred compensation is treated as received by the covered expatriate on the day before the expatriation date as a distribution. In addition, deferred compensation items that would otherwise not be taken into account under Code Sec. 83 will be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date.


What happens if people expatriate?

For individuals who expatriated after June 3, 2004 and before June 17, 2008, the above rules do not apply. Instead, Code Sec. 877 applies under which individuals who meet certain monetary thresholds are subject to regular U.S. income tax on their worldwide income for ten years following the date of expatriation.