US Tax Requirements for Expats Living Abroad - Form 8854 Explained
More and more Americans are choosing to give up their citizenship and turning in their passports to avoid paying tax in both countries. Read all the details here.
There are many reasons why an American would choose to give up their citizenship and those might include taxes, religion and ethics. America is the only country who taxes its citizens for two incomes when they are located overseas, thus causing a great hardship on many.
Some people leave the US due to marrying someone who is not a citizen or simply to return to their native land. There are some who give up their citizenship strictly for religious preference, such as Muslims desiring to be in the Middle East.
America being one of the world's richest countries is witnessing more and more citizens who are choosing to become expats. Many Americans are unaware of the many tax consequences involved in this decision and have not sought tax advice before heading to the American Consulate to turn in their passports, either.
This article will give all the latest rulings from the IRS department and some tips on how to protect the citizen from a possible $10,000 fine for not filling out the form 8854 (notification of expatriation and long term citizens ending their citizenship form).
According to the IRS, "An expatriate is someone who renounces their US citizenship or desires to terminate their residency to avoid paying income tax."
Tax Advice to Understand Before Expatriation
It is necessary before signing the form 8854 that the US citizen has brought all taxes current. They agree when signing the form that the past five years are current and paid for. Should these conditions not be met than the citizen may be held accountable for the tax owed. Failure to file and notify the IRS of this may result in fines. The IRS considers such persons who have not paid their taxes as US citizens and liable for the tax.
If the IRS suspects the person gave up their citizenship just for taxes, they may have the right to hold on to their holdings for ten years. So the reason to change citizenship needs to be something other than tax reasons. Move all the bank accounts to foreign countries first and change the ownership of any property held in America also. Some simple precautions may save the citizen lots of hardships down the road.
Although the US realizes that the main reason for renouncing citizenship is taxes, they allow citizens to renounce based on other reasons listed. Once the citizen renounces their citizenship, they may be barred from returning to the US except for periods of travel only.
The US Tax Requirements on Expatriation
According to the IRS, "The expatriation tax provisions under Section 877 and Section 877A of the Internal Revenue Code (IRC) apply to US citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes."
There are different rules for expatriates depending on the date when they officially expatriated.
- Expatriation on or after June 16, 2008
- Expatriation after June 3, 2004 and before June 16, 2008
- Expatriation on or before June 3, 2004
Americans Who Expatriated on or After June 16, 2008
New rules apply to the expatriate if they expatriated after June 16, 2008
- The average annual net income for the five years after the date of expatriation or the actual termination of residency is more than $139,000 (if the residency was terminated prior to January 1, 2009)
- The net worth of the citizen is $2 million or more on the date of expatriation or termination of residency.
- The expatriate failed to certify on form 8854 they complied for all US tax obligations for the five years before signing the expatriation or terminating residency.
Americans Who Expatriated After June 3, 2004 and Before June 16, 2008
The new form 8854 has been updated to allow individuals meet the new notification and information reporting requirements imposed by the AJCA (The American Jobs Creation Act). This revised form stipulates that the expat has met the tax obligations for the five years prior to the expatriation.
Form 8854, Initial and Annual Expatriation Information Statement (PDF)
The IRS has stated that many expats who renounced their citizenship or terminated their long term residency, simply did not know how to fill out the form. So according to the IRS, "If an individual who loses US citizenship or terminates long term resident status after June 3, 2004 files the revised form 8854 by June 15, 2005, the individual will be treated as having met his or her reporting obligations on the date on which the taxpayer provided the requisite notice to the Department of State or the Department of Homeland Security."
It is best to read the entire tax Publication 519, US Tax Guide for Aliens to understand all requirements for expats.
Americans Who Expatriated on or Before June 3, 2004
The expatriation tax provisions (prior to the AJCA amendments) apply to all US citizens who have renounced their citizenship and also for long-term residents who have decided to end their residency to avoid paying future taxes. There are two tests that may allow the expatriate to apply to the IRS and claim they did not expatriate to avoid taxes:
- If the average income for the last five tax years prior to expatriation was more than $124,000.
- The US citizen's net worth on the date of expatriation was $622,000 or more.
Expats Must File Form 8854
Form 8854 must be filed or the expatriate may be subject to a $10,000 fine. This form is used by people who relinquish their citizenship or those long term residents who want to avoid taxes in the future. This form is for people who expatriated on or after June 4, 2004
To understand all about the 8854 form, read Publication 519, Tax Guide for Aliens.
"Expatriation Tax," IRS.Gov
Nelson, Don D. "Tax Highlights for US Citizens and Residents Living Abroad," taxmeless.com
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