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U.S. Announces New Expatriation Tax
In order to cease to be taxable in Canada, an individual must give up
Canadian residence, and in the case of non-U.S. citizens, U.S. residence. A U.S. citizen may cease to be taxable in the U.S. only under certain circumstances, and only by revoking U.S. citizenship before a
consular officer.
- Revoking U.S. Citizenship or Long Term U.S. Residence
Mark to Market Tax:
Effective June 17, 2008, new Internal Revenue Code section 877A provides for an expatriation
tax for "covered expatriates". Effectively, this means that the expatriate is deemed to have disposed of all capital property at fair market value as of the date of expatriation, and must pay tax on the net
gain if it exceeds $600,000 (indexed for inflation. This is called the "mark to market" tax.
In order to be subject to the "mark to market" tax, an individual must first be
considered an "expatriate" and then must meet one of several tests to become a "covered expatriate".
- U.S. Citizen Expatriates:
A U.S. citizen becomes an "expatriate" on the earliest of the following dates:
- The date U.S. nationality is renounced before a U.S. consular officer;
- The date the individual provides a written statement of voluntary relinquishment of
U.S. nationality which is accepted by the State Department;
- The date the State Department issues a certificate of loss of nationality; or
- The date a U.S. court cancels a certificate of naturalization.
- Long Term Resident Expatriates
An individual is considered a "long term resident" of the U.S. is a person who was a
lawful permanent resident of the U.S. for at least eight of the past 15 tax years. Long term residential status is terminated by losing a green card status, either through revocation or by abandoning
residential status. An individual also ceases to be treated as a long term permanent resident of the U.S. if they are treated as a resident of another country with which the U.S. has a Treaty, and if they do
not waive rights under that Treaty, and notifies the Secretary of State of that treatment.
Caution is therefore required by any long term green card holder who does not meet the
residential requirements of that status, since they may inadvertently become expatriates under IRS code 877A.
A U.S. citizen who lives abroad and who does not revoke the application of any foreign
tax treaty, is deemed for U.S. purposes to be taxable in the U.S. Accordingly, the 10 year period begins only after the revocation of citizenship and the cessation of the use of treaty provisions.
Covered Expatriates:
In order to be subject to the "mark to market" tax , an expatriate must be considered a
"covered expatriate" by meeting one of the following tests:
1) Average net income tax liability in the U.S. for the past five years must exceed $124,000 per year;
2) The individual must have a net worth exceeding $2 million dollars; or
3) The individual has not complied with U.S. tax filing obligations for the prior five years.
Note the importance for all persons who hold U.S. citizenship or residential status to
file U.S. income tax returns each year.
The above tests do not apply to minors, or persons who were born both as a U.S. citizen,
and the citizen of another country.
Calculation of the Tax:
Any individual who expatriates on or after June 17, 2008 must complete and file form 8854
to satisfy whether they meet the "expatriate" and "covered expatriate" tests, and to provide net worth, income, and basis information required to calculate the tax, if it is applicable.
The tax is calculated under normal IRS code provisions as if all property was disposed of
at fair market value as of the expatriation date, but only if the net gain exceeds $600,000. Wash sale rules, deferral benefits such as incomplete like-kind exchanges, and involuntary conversions are
eliminated. The stepped up basis rule applies to property that was held on the date an individual first became a U.S. resident as defined in IRC 7701(b), unless an irrevocable election is made not to have this
rule apply.
A printable copy of "The Effect of Expatriation on Tax" is available here.
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