Expats and U.S. taxes: Guide to the basics
Who is an expatriate? It’s easy to assume that a U.S. citizen who moves permanently from the U.S. to France would automatically qualify as an expatriate (or expat). But the reality is more complicated. If they don’t relinquish their American citizenship, they technically don’t meet the standard. For U.S. tax purposes, they are not considered an expat.
To become an expat, a U.S. citizen must give up their U.S. citizenship by executing an official act, most commonly by renouncing their U.S. nationality before a U.S. diplomatic or consular officer.
Only U.S. resident aliens who are long-term residents can become expats. A long-term U.S. resident is an individual who is not a U.S. citizen but was a lawful permanent resident of the U.S. (green card holder) for at least eight of the last 15 years. These individuals have two pathways to becoming expats, both of which require becoming a non-resident alien:
- By administratively surrendering their green card or by having it administratively or judicially revoked or considered abandoned, or
- By becoming a resident of another country under a tax treaty and notifying the IRS of the commencement of such treatment without waiving the benefits of such treaty applicable to residents of the foreign country.
A resident alien classified as such based on the substantial presence becomes a non-resident alien by subsequently failing to meet the substantial presence test, or by meeting all of the following: (However, such individual is not considered an expatriate.)
- Being in the U.S. for less than 183 days during the current year
- Having a tax home in the foreign country during the current year
- Having a closer connection to the foreign country than to the U.S.
A resident alien classified as such based on being a green card holder but who does not meet the definition of a long-term resident becomes a non-resident alien in the same manner as a long-term resident (see above). However, such an individual will also not be considered an expatriate.
Tax consequences for expats
If a technical expatriation has occurred, a number of tax consequences may result, including the application of the exit tax, a Form 1040-NR filing requirement, a dual status filing year, the availability of various elections and the possibility of certain treaty positions.
The exit tax was established to help ensure that all unpaid taxes are settled before a U.S. citizen or long-term permanent resident withdraws from the U.S. tax system. Individuals subject to the exit tax generally are assessed tax as if they had sold all of their assets the day before they left the country.
Form 8854 is used by expatriates to certify compliance with tax obligations going back five years before expatriation and to comply with their initial and annual information reporting obligations under section 6039G.
Provided the expatriate has a closer connection to a foreign country than to the United States after expatriation, a Form 1040-NR will also be required for the year of expatriation. Forms 1040-NR may also be required for years subsequent to the year of expatriation.
If a U.S. citizen or long-term permanent resident does not meet the technical tax definition for expatriation, there is no effect on their tax situation for moving outside the U.S. They will still be taxed on their worldwide income.
Individuals should use caution when analyzing the U.S. tax consequences to a U.S. citizen or long-term permanent resident where the facts suggest a potential expatriation.
How Wipfli can help
Wipfli’s international tax specialists are ready to assist U.S. citizens and green card holders living and working abroad to better understand and navigate their tax challenges. The issues can be complex, and we are skilled at recommending and tailoring solutions to meet the tax requirements of U.S. citizens, expats and those considering or pursuing expat status. Contact us today to get started. We look forward to speaking with you soon.
