US Citizens and some Green Card holders may be required to file an expatriation statement form 8854 and potentially pay expatriation taxes if they are a “Covered Expatriate. Due to these complexities, it is important to talk with a Certified Public Accountant with Independent Expat Tax.
Becoming a Covered Expatriate is an important consideration for U.S. citizens and Long-Term Residents. Three main ways to meet the covered expatriate test include having an average annual net income tax liability exceeding a specific amount for the five years before expatriation, having a net worth of $2 million or more on the date of expatriation, or failing to certify on Form 8854 compliance with all federal tax obligations for the five years preceding expatriation.
Of the three factors above, we have found most of our clients come to us because they do not have five years of tax compliance prior to expatriation. If we can help you catch up with tax filing prior to expatriation, you can avoid being a covered expatriate if that is the only one of the three tests you are missing.
Surprisingly Green Card holders may also qualify as “Covered Expatriates” if they are a “Long-Term Resident.” To qualify as a Long-Term Resident, an individual must be a lawful permanent resident Green Card holder for at least 8 of the last 15 tax years. It’s important to note that actual physical residence in the U.S. during that time is not a requirement. Simply having the status of a legal permanent resident is sufficient.
The termination of legal permanent residency occurs on the earliest of several dates, such as voluntarily abandoning the lawful permanent resident status or being subject to a final administrative or judicial order for removal. We have also heard stories of immigration agents asking Green Card holders who have been abroad for an extended period to surrender their Green Cards at the US border upon entry.
It’s crucial to understand that the expiration of a Green Card does not automatically mean the relinquishment of permanent resident status. A person must take affirmative action to voluntarily abandon their Green Card. The expiration of a Green Card only signifies that the individual no longer possesses a valid Green Card, but it does not eliminate your status as a Green Card holder.
To determine if a person is a Lawful Permanent Resident, their status should not have been revoked or judicially or administratively determined to be abandoned. If a person’s Green Card has not been revoked or abandoned, they are still considered a Lawful Permanent Resident.
When a person is a Covered Expatriate, they may be subject to an exit tax in addition to ongoing filing requirements. However, there are exceptions for dual citizens and certain minors. These exceptions are based on specific criteria, such as being a dual citizen since birth and being a resident of the U.S. for a limited number of years.
The tax implications of the Exit Tax fall under Section 877A, which requires filing Form 8854. You will also likely need to file a dual-status tax return. Ongoing filing requirements may apply in situations where tax was delayed or when a bond was posted or if the covered expatriate still has certain U.S. investments or pensions.
Certain Green Card holders may wish to abandon their Green Cards early so they are not considered a long-term resident. Others who are giving up their residency or citizenship may need to get five years of tax compliance. That is why it is important to consult US expat tax professionals at Independence Expat Tax about any planned surrender of your Green Card or US Citizenship.