Renouncing a citizenship is a major decision with serious financial, social, and emotional consequences. For United States citizens, this decision in many cases is prompted by the fact that United States is the only remaining major economy that still taxes its people on the worldwide income and the new FATCA (Foreign Account Tax Compliance Act) reporting rules that allow the IRS to look into all offshore accounts. The only way for Americans to stop paying and reporting to the Internal Revenue Service is to legalize the breakup – officially rescind the US citizenship, file the last tax return and, if the exit tax has been assessed, pay the last dues on the way out.
But what does it mean for citizens of other countries that legally reside in the United States of America? Unfortunately for green card holders, their decision to leave the United States might have just as serious tax implications as they do for US citizens. It all depends on the duration of the relationship – if a green card expatriate has spent eight out of the last fifteen tax years in the United States and if there are substantial assets involved, his or hers expatriation might very well be just as complex and expensive. First, IRS Form 8854 will have to be filed with the last tax return of the expatriate to document all the assets under a threat of a $ 10,000 penalty if failing to do so. Then, just like a citizen would do in this situation, a long-term resident should apply the following three-prong test to see if he or she is a “covered expatriate”:
- Net value of assets owned is $ 2 million or more
- Average annual net income tax paid for the last 5 years exceeds $171,000 (This is a 2020 threshold and is adjusted for inflation annually)
- Compliance with all U.S. federal tax obligations for the preceding 5 years is not up to date and/or is not certifiable.
If any of the above statements are true, a green card holder is deemed to be a covered expatriate and must go through the mechanics of assessing the final tax that has to be paid at exit. The tax is paid on the capital gain on all assets owned as if they were sold or distributed a day before expatriation. “All assets” in this case indeed means all of them –located in the United States and offshore, personal and invested in businesses, current and deferred, such as retirement accounts or unvested shares.
There is an exemption amount determined by the IRS every year that softens the impact of the exit tax a bit and there are also some planning strategies available to future expatriates, especially those that plan their exit well in advance. But the simplest and surest escape plan for green card holders is to be aware of the 8-year residency threshold and avoid overstaying it if living in the United States is not their long-term plans.