For federal tax purposes, an expatriate is an individual who has renounced their citizenship, or is a long-term resident who has ended their U.S. resident status. Expatriates must file Form 8854, which certifies that they fulfilled their federal tax obligations for the five years prior to the date they expatriated. Tax rules can change depending on when the individual expatriated.
Keep reading to learn about expatriates and what types of tax liabilities to the U.S. they hold, even after renouncing their U.S. citizenships.
Definition and Examples of Expatriates
An expatriate is a taxpayer who has renounced their U.S. citizenship or has abandoned their green card. An expatriate is required to file Form 8854, certifying that they satisfied their tax obligations for the five years before their expatriation date. If they did not meet the requirements, the taxpayer is subject to the expatriation tax. Different expatriation tax rules can apply depending on the date of expatriation, the taxpayer’s net worth, and income.
- Alternate name: Expat
Anyone who moves abroad could be considered an expatriate. For example, someone might renounce their citizenship in July 2008 with a net worth of $2.5 million. That person became an expatriate in 2008. If they did not comply with tax obligations for any of the five years preceding 2008, they will be subject to an expatriate tax.
How Being an Expatriate Works
The IRS requires expatriates to file Form 8854 to certify that they have complied with all U.S. federal tax obligations for the five years preceding their expatriation dates.
Expatriates who fail to file Form 8854 may be subject to a $10,000 penalty.
Keep in mind that taxes may apply even to income earned in another country. If a taxpayer expatriated after June 3, 2004, and before June 17, 2008, they are still subject to a U.S. tax on worldwide income for “any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.” The Foreign Account Tax Compliance Act (FATCA) was passed in 2010, requiring foreign financial institutions to report information on accounts they believe belong to U.S. citizens. This hinders U.S. citizens’ ability to hide their financial activity in another country.
If a taxpayer expatriated after June 16, 2008, and meets certain conditions, they may be classified as a “covered expatriate.” Unlike non-covered expatriates, the IRS requires covered expatriates to pay income taxes on the “net unrealized gain in your property as if the property had been sold for its fair market value on the day before your expatriation date.” Essentially, it is an exit tax on the difference between the asset’s fair market value and the price the taxpayer bought it for.
In addition to expatriating after June 16, 2008, you are considered a covered expatriate if:
- Your net worth is $2 million or more on your expatriation date.
- You failed to certify on Form 8854 that you complied with your tax obligations for the five years preceding your expatriation date.
- You meet certain average annual net income, which is adjusted for inflation for the year you expatriated: $161,000 in 2016, $162,000 in 2017, $165,000 in 2018, $168,000 for 2019, $171,000 in 2020, and $172,000 in 2021.
Keep in mind that you do not need to meet all three of the above requirements—meeting just one of them can qualify you as a covered expatriate. Generally, expatriates do not want to meet this definition, as the exit tax can be a significant expense.
Exceptions for Minors and Dual Citizens
Certain minors and dual citizens may not be classified as covered expatriates. Dual citizens, for example, would not be subject to covered-expatriate taxes if they lived in the U.S. for no more than 10 years during the 15-tax-year period and are tax-paying citizens in another country.
Dual citizens and certain minors must still file Form 8854, certifying that they fulfilled all federal tax obligations in the five tax years preceding their expatriation date.
Relief for U.S. Citizens Who Expatriated After March 18, 2010
The IRS can offer relief to those who expatriated after March 18, 2010, under the Relief Procedures for Certain Former Citizens. Eligible expatriates must fulfill the following requirements:
- Have a net worth of less than $2 million at the time of expatriation
- Have an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years
If an expatriate meets these conditions, they will not be a covered expatriate under IRC 877, and “will not be liable for unpaid taxes and penalties for these years or any previous years.”
Taxpayers who did not file their required tax returns due to non-willful conduct are also eligible. The IRS considers non-willful conduct as conduct that arises from “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
- An expatriate is a U.S. citizen who has renounced their citizenship and is subject to certain tax provisions after they have renounced their citizenship.
- Expatriates are required to file Form 8854 (Initial and Annual Expatriation Statement), which certifies that they fulfilled their federal tax obligations for the five years preceding their expatriation dates.
- Covered expatriates must pay income taxes on the net unrealized gains in their property values based on fair market values on the day before their expatriation dates if they renounced their U.S. citizenships after June 16, 2008, and meet certain income requirements or did not fulfill their tax obligations for the five years preceding their expatriation dates.
- U.S. citizens that would otherwise be considered covered expatriations may qualify for tax relief under the Relief Procedures for Certain Former Citizens if they meet certain net worth and tax liability conditions.