In this three-part article series, Oliver Burton of Blick Rothenberg, together with Tahir Mahmood and Todd Cowan of London & Capital give a comprehensive overview of expatriation. They discuss the basics of expatriation and who it impacts, all the way through to the planning opportunities available.
What is expatriation?
The term ‘expatriation’ can be defined as a voluntary departure from the country in which an individual is a citizen – be it from birth or on a naturalised basis.
There is usually a physical departure involved in some way, but when we use the term ‘expatriation’ we are also referring to the more formal, administrative side of renouncing one’s citizenship.
In this article, we discuss expatriation from the US and the associated tax implications. It is not just US citizens that need to be aware of the rules here. As we will see, Green Card holders are often impacted in the same way if they choose to hand back their permanent resident status.
Why do people do it?
There are many reasons why an individual may choose to expatriate from the US or surrender their permanent resident status, but tax is usually one of the driving factors.
The US is one of the only jurisdictions in the world that looks to impose a tax on a citizenship basis. This typically means that a US citizen is held within the scope of US taxation irrespective of where they are located and for how long.
For example, a US citizen who has become a long-term resident of the UK will be obliged to keep up with their US tax obligations for as long as they retain that US citizen status.
Similarly, non-US citizens who hold US Green Cards for extended periods of time will often be subject to those same obligations, even though they may have left the US for good.
Individuals in that position are of course within the scope of tax legislation in the UK or wherever else they may reside. Managing two tax systems in this way can be an onerous exercise when it comes to both filing obligations and the payment of tax.
What happens to an individual’s US tax return obligations?
In the year of expatriation or abandonment of permanent resident status, the individual will need to submit Form 8854 with their US income tax return.
Once the tax return for the year of expatriation or abandonment has been submitted, the individual in question will likely be a non-resident alien for US tax purposes. This generally means that they will only be expected to submit US tax returns in future if they are in receipt of US sourced income, they are engaged in a US trade or business, or if they are spending significant amounts of time in the US.
In some situations, individuals will be required to file Form 8854 on an annual basis after the initial year. This is normally only relevant where there has been a deferral of tax or if the individual has a specifically complex aspect to their affairs.
Are there any costs associated with expatriation and abandonment of permanent resident status?
There can be – and sometimes they can be significant.
To start with, there is the process itself. An individual will need to pay a $2,350 fee to the US Embassy when attending their appointment.
Good tax and immigration advice is always recommended. Individuals should be mindful of the fact that engaging tax advisors and lawyers will bring in an additional cost, and that cost can vary depending on the complexity of their affairs.
Lastly, some individuals will be required to pay the infamous ‘exit tax’.
Read the next article of our Expatriation series where Oliver Burton of Blick Rothenberg, together with Tahir Mahmood and Todd Cowan of London & Capital will be discussing “The expatriation process and the exit tax”. Sign up to our newsletter to get this delivered straight to your inbox.
