global Tax Relinquishing U.S. Citizenship? What You Should Know about the Exit Tax and Covered Expat Status February 20, 2024 Are you relinquishing your U.S. Citizenship or renouncing your U.S. Green Card? Could you be considered a covered expatriate? How are covered expats taxed? We explore here. Who is a covered expatriate? If you expatriated on or after June 17, 2008, you are considered a covered expatriate if you meet any of these tests: Your average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($178,000 for 2022, $190,000 for 2023, and $201,000 for 2024).Your net worth is $2 million or more on the date of your expatriation or termination of residency.You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. You are not subject to the exit tax if you do not meet any of the three requirements above, but you’d still have to file Form 8854. Check out our blog, Relinquishing U.S. Citizenship? Here are your Filing Obligations Exit Tax Under the Exit tax provisions, the covered expatriate is subject to tax on the net unrealized gain on most of their worldwide assets as if the property were sold for its fair market value on the day before the expatriation date. There is an exclusion ($821,000 for 2023 and $866,000 for 2024) available to offset the unrealized gain which is indexed for inflation. Any excess above the exclusion is taxed. Covered expatriate exceptions There are a few exceptions to the covered expatriation rules. For example, certain minors and dual citizens may not be considered covered expatriates even if they would otherwise be deemed a covered expatriate under the tests noted above. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the five years preceding the date of expatriation. Dual citizens You can qualify for the exception described above if you meet both of the following requirements. You became a U.S. citizen at birth and a citizen of another country and, as of your expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.You were a resident of the United States for not more than 10 years during the 15-tax-year period that end with the year that you expatriated. To determine U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519. Minors You can qualify for the exception described above if you meet both of the following requirements. You expatriated before you were 18½.You were a resident of the United States for not more than 10 tax years before you expatriated. To determine U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519. Questions? Wondering if you fit the definition of a covered expatriate? Feel free to contact a member of our International Tax Services Practice.
