Fact vs. Myth on Expatriation: Giving Up US Citizenship or Long-Term Green Card
[author-style]By Carola Knoll, CPA, Manager [email protected][/author-style]
MYTH 1: THERE IS A MASS EXODUS OF AMERICANS WHO ARE SEEKING TO EXPATRIATE FOR TAX REASONS
FACTS: The U.S.’s individual income tax rates are relatively low compared to those of European countries and Canada. Even for the top 1%! So while there may be some Americans giving up their citizenship for tax motivated reasons, the total “expatriations” from the U.S. during 2011 by “covered” expatriates was 1,788 according to the official count in the Federal Register. That is only 0.03% of the total 7 million or so Americans estimated by the IRS to be living abroad (not including military personnel). Granted the number of people who are listed in the register as renouncing their citizenship has risen to an all-time high — nearly quadrupling over a four-year period — from 470 in 2007 to 1,788 in 2011, but it is still relatively low compared to the population of U.S. persons who are residents (possibly also citizens) of another country. So the impression given by the media that there are a huge number of Americans who are giving up their citizenship for tax reasons is false.
MYTH 2: IF YOU EXPATRIATE, YOU WILL CANNOT TO COME BACK TO THE U.S. (OR MAY NOT COME BACK FOR MORE THAN 30 DAYS OR 90 DAYS…)
FACTS: A U.S. citizen who gives up U.S. citizenship and a long-term U.S. resident who terminates U.S. residency after June 16, 2008 may be subject to the Code Sec. 877A rules. The expatriation rules prior to that date were very different compared to the current rules regarding days visiting the U.S. after expatriation.
Under Code Sec. 877A, the current expatriation tax law in effect, there is no limitation on the number of days that an expatriate may return to the U.S. Except, of course, such individuals should take care to avoid spending enough time in the U.S. to exceed the number of days in any given year that would cause them to be considered a U.S. tax resident under the substantial presence test [Code Section 7701(b)].
For persons who expatriated after June 3, 2004 and before June 17, 2008, there was a maximum limit of 30 days in the calendar year for 10 years after expatriation that one could spend in the U.S. or else they may be taxed as a U.S. citizen and resident, rather than as a nonresident under the expatriation rules. That 30-day limitation is no longer relevant for expatriations occurring after June 17, 2008 when Code Section 877A came into effect.
Senators Charles Schumer and Bob Casey did introduce legislation last year, the “Ex-PATRIOT Act”, which would add a prohibition on ever being allowed back onto U.S. soil if one expatriated for tax reasons. However, that is just proposed at this stage, and not law. There is existing law (not under the Tax Code), commonly referred to as the “Reed amendment”, that does excludes aliens from re-entry who have been determined by the Attorney General as having “…renounced their U.S. citizenship for the purpose of avoiding taxation by the United States…” In the past, that law has never been enforced. However, there have been reports in the press in the past year that 2 or 3 individuals had been denied entry into the U.S. under the Reed amendment provisions. If that is true, given that it is only if the expatriation is tax motivated whereby entry into the U.S. might be denied, then one should avoid mentioning taxes as a reason for renunciation when there are likely other valid reasons for expatriation.
MYTH 3: IF YOU EXPATRIATE, YOU MUST PAY AN EXIT TAX TO THE IRS
FACTS: Firstly, the “exit” tax under IRC Section 877A only applies if you are a “covered” expatriate and the gain on a theoretical sale of all property taking place the day before expatriation is MORE than $668,000 (2013 amount). You would deduct your tax basis cost of the property against the fair market value of your assets as of the day before expatriation to compute the gain as if all of those assets were sold and the “exit tax” only applies if that gain is above the threshold amount.
Under 877A, a person who expatriates will be a “covered” expatriate if:
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- The individual’s average annual net income tax for the period of 5 tax years ending before the date U.S. citizenship is lost is greater than an inflation adjusted amount that is $155,000 for losses of citizenship in calendar year 2013;
- The net worth of the individual as of the date U.S. citizenship is lost is $2,000,000 or more, or
Li>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.
If you do not fall under any of the above three tests, you are not a “covered” expatriate, and therefore not subject to the exit tax under 877A.
There are also a couple more exceptions with respect to who would be considered “covered” under items 1. and 2. above (however, such persons still needs to meet 3. – or they will be considered “covered” expatriates): (A) a dual citizen at birth of the U.S. and another country, who on the expatriation date continues to be a citizen of, and is taxed as a resident of, the other country, and who has been a U.S. resident (as defined in Code Sec. 7701(b)(1)(A)(ii)), for not more than 10 tax years during the 15 tax-year period ending with the tax year in which the expatriation date occurs, or (B) a person who gives up U.S. citizenship before becoming 18 1/2 years old, and who was a U.S. resident for not more than 10 tax years before the relinquishment date. So long as the individual who meets (A) or (B) above has been U.S. tax compliant and certifies as such upon expatriation, he or she would not be a “covered” expatriate and not subject to the 877A exit tax.
MYTH 4: IF YOU HAVE BEEN A U.S. RESIDENT FOR A LONG TIME, AND YOU GIVE UP YOUR U.S. RESIDENCY PERMANENTLY, YOU ARE SUBJECT TO THE “EXPATRIATION” EXIT TAX RULES, EVEN IF YOU ARE NOT A U.S. CITIZEN.
FACTS: Only long-term green card holders (“lawful permanent” residents) are potentially subject to the 877A expatriation rules. If a noncitizen, who has been tax resident in the U.S. for many years but is not a lawful permanent resident / green card holder, decides to end his or her U.S. tax residency status, he or she may do so without any concern of being subject to the expatriation tax regime under 877A. A long-term resident is defined as a noncitizen individual who is a lawful U.S. permanent resident in at least 8 tax years during the period of 15 tax years ending with the tax year during which the expatriating event (described below) occurs. The time frame could be as short as 6 years and 2 days, if the 2 days were the last day of the first year, and the 1st day of the 8th year (year of expatriating event), since the individual just needs to be a green card holder at some point during the taxable year.
A long-term resident ceases to be a lawful permanent resident if (i) the individual’s status of having been lawfully accorded the privilege of residing permanently in the U.S. as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (ii) the individual (a) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the U.S. and the foreign country, (b) does not waive the benefits of the treaty applicable to residents of the foreign country, and (c) notifies IRS of his treatment on Forms 8833 and 8854. Regarding long-term residents, it may not be well known, even to most practitioners, that taking a “treaty-tie breaker” position for a green-card holder to claim residency in their country of residence would be an expatriating act.
Quick Facts About FATCA
[author-style]By Kimberlee Phelan, CPA, MBA, Partner, Practice Leader, International Services Group [email protected][/author-style]
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA enhances U.S. compliance required by certain U.S. persons having foreign bank accounts or owning foreign financial assets, as well as requires foreign financial institutions with U.S. account holders (including U.S. shareholders owning a substantial portion of foreign entities) to report activity directly to the IRS. IRS Regulations under FATCA (totaling 544 pages) were published on January 17, 2013. U.S. Taxpayers are required to report foreign financial assets for tax years beginning after March 18, 2010 (for most taxpayers reporting was required beginning with the 2011 tax return). Foreign financial institutions (FFIs) are required to begin complying with FATCA on July 1, 2014. (Note: FFis must register on the FFI Registration Portal by April 25, 2014.)
REPORTING OF FOREIGN ACCOUNTS/FINANCIAL ASSETS BY U.S. TAXPAYERS
WHO: U.S. taxpayers (citizens and resident aliens) filing Form 1040 are required to report direct and indirect ownership of foreign bank accounts (H total > $10,000) and certain other foreign financial assets (if total > $50,000).
WHAT: Form TD 90-22.1 (Foreign Bank Account Report – FBAR) is required for all accounts in which a U.S. taxpayer has a financial interest, which includes bank accounts of foreign entities in which a U.S. shareholder owns, directly or indirectly, a majority. Additionally, reporting is required of all U.S. taxpayers with signature authority over a foreign bank account. Form 8938 is required to report not only a financial interest in a foreign bank account, but other foreign financial assets, including direct and indirect ownership of foreign entities.
WHEN: FBARs are due directly to the U.S. Department of Treasury on June 30th each year (NB! FBARs are to be received in Detroit, Michigan on June 30th, not simply mailed by June 30th). Form 8938 is filed annually with Form 1040. At this time, Form 8938 is not required by taxpayers other than U.S. citizens/residents filing Form 1040.
WHY: Penalties for failure to comply can be severe. Failure to file a complete and accurate Form 8938 begins at $10,000 (and can increase up to $50,000). Underpayment of U.S. tax from foreign unreported income is subject to an underpayment penalty of 40% and could incur fraud penalties (75% of underpayment) as well as criminal penalties, including jail time.
REPORTING BY FOREIGN FINANCIAL INSTITUTIONS
Participating foreign financial institutions will be required to:
- Identify and conduct due diligence on account holders to ascertain U.S. account holders
- Report annually to the IRS on its U.S. account holders, including foreign entities with substantial U.S. ownership
- Withhold and remit to the IRS 30% of any payments of U.S.-source income (as well as 30% of gross proceeds from the sale of securities which generated U.S.-source income) made to non-participating foreign financial institutions, individuals account holders failing to provide adequate information to determine whether or not they are U.S. persons, or non-U.S. entity account holders failing to provide adequate information to determine if the entity is substantially owned by U.S. persons.
The intent of FATCA is to prevent U.S. persons from “hiding” income and assets overseas. Frequently, U.S. persons will not bear substantial additional U.S. tax on income generated by foreign financial assets (as the income is likely to be taxed in the foreign jurisdiction and a foreign tax credit can be claimed thereon); however, the penalties for failure to report and comply with FATCA can be excessive– certainly well beyond the additional costs of complying with FATCA.
Inside the Life of a Dutch Entrepreneur
[author-style]By Corney Versteden, LLM, Senior Tax Partner | HLB Van Daal & Partners | NV in Waalwijk, The Netherlands[/author-style]
While I was flying to Hong Kong last week, I realized that Dutch entrepreneurs no longer sail the oceans in big ships. They now fly around the world in fast planes. Some of them in the relatively comfort of business class and some in economy class. Those entrepreneurs, however, all have something in common: They see opportunities where other people don’t see them. The good entrepreneurs not only see them, they are bold enough to seize those opportunities and make something happen. They travel around the world and miss out on things that many people find very normal, like a family life.
I’m lucky to have many of those entrepreneurs as my clients. They don’t consider failure as an option and they radiate success. These entrepreneurs make other people believe in the good outcome of their new adventures. The best entrepreneurs make it even seem as it is not a real adventure. For them, it is simply a low hanging fruit that no one noticed before. They only have to grab it. I admire these people. They form a strong basis for the Dutch export and are also responsible for a lot of employment in The Netherlands. I feel that sometimes they only miss out on the respect of the ones who stay behind.
Get to know the WS+B’s Core Experts on our International Team
Meet the Players: Ed O’Connell CPA/CFF/CGMA, CFE, Partner
Ed is a partner in our New Brunswick and Red Bank, NJ offices with over 19 years of experience in public accounting. Ed’s expertise lies in accounting and auditing issues affecting companies from start-ups to established entities. Ed concentrates his efforts on helping companies navigate through the complex regulatory environment affecting the financial reporting of private and public companies, including those with international operations. Ed also assists companies with data analysis to help companies identify areas for operational and efficiency improvement, and is the firm’s Team Leader for International Financial Reporting Standards.
A graduate of Rider University, Ed is a Chartered Global Management Accountant, in addition to being a Certified Public Accountant and Certified Fraud Examiner. He is a member of the American Institute of Certified Public Accountants (AICPA) and a member of the New Jersey Society of Certified Public Accountants (NJSCPA), where he serves as a member of the Board of Trustees. In the community, Ed is a board member of the Tick-Borne Disease Alliance, BigBrothersBigSisters of Monmouth & Middlesex Counties, Junior Achievement of NJ (Central Jersey Board), and the Old Bridge Little League.
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