Deciding to move abroad for a while or invest money in ventures outside the United States can subject U.S. citizens and resident aliens to confusing tax and reporting requirements, as outlined in previous articles on Living Abroad: Expat Tax Rules and Government Shines Spotlight on Foreign Investments. Some foreign residents and investors might wonder – tongue in cheek – if the benefits of U.S. citizenship or residency are worth all these obligations.
For anyone who is seriously considering expatriation – i.e., renouncing citizenship or giving up permanent residency – there’s another tax issue to consider: what the IRS calls an “alternative tax regime for certain, expatriated individuals,” better known as the “anti-expatriation” rules. Essentially, this regime calls for individuals who end their citizenship or give up long-term resident status to pay tax on the net appreciation of all their worldwide assets as though they were sold on the day before expatriation. This law applies to those with average annual net income tax above $145,000 for the five years before expatriation or those with net worth above $2 million. For those who expatriated in 2008, the net income limit was $139,000.
The law provides an exception for up to $600,000 in 2008 ($626,000 in 2009) of gains or interest in deferred compensation plans and nongrantor trusts, which instead are subject to a 30 percent withholding tax on distributions. It also provides exceptions for minors who became citizens at birth and have not been present in the United States for more than 30 days during any of the 10 preceding years, and for some dual citizens who continue their citizenship in the other country and are subject to its tax laws.
People who expatriated before June 17 last year were covered under a more complicated but potentially less onerous tax regime.
Coming back after expatriation
Once you leave and declare your intent to expatriate, beware of the rules for visiting the United States. During the 10 years after expatriation, expatriated individuals will be treated – and taxed – as U.S. citizens or residents in any year in which they are present in the United States for more than 30 days. The tax laws provide an exception for individuals who are in the country to provide personal services for an unrelated employer. The exception is available only for individuals who 1) became a citizen of their country of birth or that of their spouse or either spouse’s parents, or 2) were physically present in the United States for 30 days or less in each of the 10 years before expatriation.
Expatriates’ reporting forms
Expatriates are required to file Form W-8CE with anyone who is obligated to pay them deferred compensation in the future, financial institutions in which they hold tax-deferred accounts, and fiduciaries of nongrantor trusts of which they are beneficiaries. The form notifies these “payers” that the individual is an expatriate who is covered by the law and subject to withholding on any payments made to him/her. The form is generally due within 30 days of expatriation. However, since the form still hasn’t been released, the IRS gave individuals who expatriated between June 16, 2008 and the release date an extension. Their forms will be due within 30 days of the release date. (Although the new form still has not been released on paper, an electronic version is now available on the IRS website – search the Forms and Publications section for W-8CE.)
Expatriates also must file Form 8854, Initial and Annual Expatriation Information Statement, with the IRS by the date their tax return is due each year. For individuals living and working outside the United States, the due date is June 15. Because of the change in the law last year, the new Form 8854 for 2008 is not yet available, though the IRS says it should be released before the filing deadline. The IRS also gave individuals who expatriated before June 17, 2008, the option of using the 2007 form. For those who gave up their citizenship or permanent residency after that date, the agency said the new form must be used, noting that the June 15 deadline will apply to those living abroad.
[Editor’s Note: This article has been updated to include information about a new reporting form for expatriates who had deferred compensation, held money in tax-deferred accounts, or were beneficiaries of nongrantor trusts on the day before expatriation.]