If I abandon my green card or US citizenship, what are the tax consequences?

June 30, 2014 Mario Guevara-Martinez

Published on 30 June 2014 Hits: 1599

If I abandon my green card or US citizenship, what are the tax consequences?

The U.S. imposes income tax on the worldwide income of its citizens and green card holders even if they reside overseas. U.S. citizens and certain green card holders residing overseas are also subject to U.S. gift and estate tax on transfers of worldwide assets. As a result, such individuals sometimes consider relinquishing their citizenship or green card with the hope of freeing themselves from the U.S. tax system.

However, giving up U.S. citizenship or a green card on or after June 17, 2008 – the date of enactment of the Heroes Earning Assistance and Relief Tax (HEART) Act, P.L. 110-245 – may cause the expatriating individual to be subject to an exit tax and treated as if all assets were sold on the day before the expatriation date.

Who Are Affected?

The new exit tax provisions apply to “covered expatriates.” A “covered expatriate” is a U.S. citizen who renounces his citizenship or a permanent resident who terminates his status after having a green card for at least eight of the last 15 years. Covered are citizens and long term green card holders for eight years of the 15 years prior to exit:

With five year average annual net income tax liability greater than an inflation-adjusted amount ($155,000 in 2013); or
With net worth of $2 million or more; or
Who are not in full compliance with the US Tax Code (both filings and payments) for the five tax years preceding exit.

If You Are a “Covered Expatriate,” How Will You Be Taxed?

The first main provision is a tax on the "deemed sale" of all your assets the day before expatriation. In other words, you are taxed on the mark-to-market net gain of all your assets. The IRS defines the assets which should be included in this "deemed sale" as everything which would have been included in your estate if you had died the day before expatriation.

For the mark-to-market tax, you calculate as if you had sold all your assets on the day before expatriation. You have to pay tax on the theoretical profit which that sale would have given you.

Under the 2012 standards, the first $651,000 is excluded, and so only a net gain of above $651,000 is taxed.

For example, the value of all your assets the day before your expatriation is $4,000,000. You calculate that your basis, or the price you paid for those assets, is $2,000,000. So your net gain, or paper profit, from the "deemed sale" is $2,000,000. You are allowed to exclude $651,000 (as of 2012) of that, so the amount subject to tax will be $1,349,000.

Although you do not actually sell anything, it is all taxed for IRS purposes exactly as if you had sold it all. Therefore, it is possible that you do not have the cash to pay the IRS in these likely scenarios: you own a business, a house, or some other assets which you cannot sell - or don't want to - so any supposed gain from the "deemed sale" is only a paper profit. If you do not have the cash to pay the IRS, you will be able to make an irrevocable election to defer payment of the tax by entering into a deferral agreement with the IRS. You can defer the payment, but you will have to post "acceptable" security as collateral against the tax bill for that asset. You will also be charged interest until you pay. The tax must be paid by the earlier of a) the sale of the asset, or b) your death.

The mark-to-market tax does not apply to certain property, including deferred compensation items (e.g. qualified retirement plans), specific tax deferred accounts (e.g. individual retirement accounts) and interest in non-grantor trusts. These items are subject to either a 30 percent withholding tax on future distribution or an immediate tax on the present value of the entire interest or account as of the day before expatriation.

What will my filing obligations be if I expatriate?

You will need to file a dual status tax return for the year during which you expatriate. A dual status tax return consists of a Form 1040NR (for the portion of the year beginning with your expatriation date), with a Form 1040 (for the portion of the year preceding your expatriation date) attached as a schedule. See Publication 519, U.S. Tax Guide for Aliens, for more information about dual status returns. You will need to report the tax that is due under the mark-to-market regime on the Form 1040, even if you elect to defer payment of that tax.

You will also need to file Form 8854 with your dual status return to certify that you have been in compliance with all federal tax laws during the 5 years proceeding the year during which you expatriate. The initial Form 8854 is also used for certain other purposes such as waiving treaty benefits for eligible deferred compensation items. See the Instructions for Form 8854 for further information.

As such, be mindful that once a permanent resident or U.S. citizen, relinquishing your green cards or citizenship may have immediate tax cost in addition to immigration consequences. Therefore, we strongly recommend a careful planning in both applying for and relinquishing permanent resident status or US citizenship.