Moving Out of the US: An Expatriation & Federal Taxes Overview

An Expatriation & Federal Taxes Overview

For US Citizens and certain Lawful Permanent Residents who are considered Long-Term Lawful Permanent Residents, the process of leaving the United States and giving up their US status (aka expatriation) can be unnecessarily complicated. That is because when US Citizens and Long-Term Residents either renounce their US citizenship or relinquish their Lawful Permanent Resident status, there are several formalities they may have to go through in order to obtain freedom from the US tax system – at least freedom from being taxed as a US person on their worldwide income. There are many twists and turns involving expatriation, so here are six important tax implications to be aware of when moving out of the United States.

Covered Expatriates and Exit Taxes

When a US Citizen or Lawful Permanent Resident wants to leave the US tax system, they have to file an IRS Form 8854 in addition to their regular tax return. Typically, they will also file a dual-status tax return in their final year. If it turns out that the taxpayer is a Covered Expatriate then Form 8854 can become much more complicated, depending on what type of US and foreign assets they own at the time of exit. It could unfortunately lead to a very significant exit tax consequence for certain taxpayers with deferred compensation and unrecognized gain.

Retirement Plans (401K, IRA, and more)

When a person has a retirement plan and a 401(k) (or similar employment pension) and is considered a covered expatriate, generally, they will not become subject to an exit tax on this particular asset at the time they leave the United States — but it can become an issue later down the line. Still, they may decide to empty out their 401(k) and pay tax at the time of exit, but that is a taxpayer-specific strategy to be determined by each expatriate at the time of exiting the US. While the 401(k) is not technically taxed at the time of exit, other types of retirement plans may be taxable. It can get more complicated when a taxpayer moves a 401(k) into an IRA — usually subsequent to having retired from their employment. Moreover, in future years, if the taxpayer resides in a treaty country they may want to make a treaty election to reduce their withholding on their 401(k) — but unfortunately at the time of expatriation, a person generally must make an irrevocable waiver regarding future retirement withholding.

Deferred Compensation (RSU, RSA, etc.)

Deferred compensation can come in many shapes and sizes. When a person has deferred compensation such as an RSU or RSA, it can also get very complex because not all deferred compensation will qualify for deferred tax treatment. In addition, even when certain restricted stock/units have not actually been vested, the IRS can require the taxpayer to estimate the value at the time of expatriation.

Nonresident Alien Withholding

Once a person formally expatriates and becomes a non-resident alien, if the person still has US investments or makes US investments in the future, they may become subject to a 30% withholding tax. The income is referred to as FDAP for NRAs. Certain tax treaty provisions may reduce or eliminate tax withholdings.

It Goes On Your Permanent Record (6039G)

The US Government keeps its own little black book that it uses to keep tabs on individuals who formally expatriated from the United States. Each quarter, the US government publishes an updated section 6039G list to identify all the individuals who recently expatriated and were processed by the US government.

You May Have Future Reporting (Form 708)

If you are a covered expatriate and plan on giving certain gifts or bequests to US persons, you may still be required to report this on IRS Form 708. The form is similar in concept to the 706 or 709 gift and estate tax reporting forms — except for the fact that at the present time, Form 708 has not actually been created yet. The IRS proposed regulations have yet to be finalized.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.