There’s been a lot of news in recent months about the number of individuals who expatriate from the United States. The number has risen considerably from year to year, according to Treasury figures. In this video, we focus on what it means to be an “expatriator” and the tax implications for international assignees who have come to the U.S., have become long-term residents, and then decide they wish to return to their home countries and cease to be lawful permanent residents by either relinquishing their green cards or claiming the benefit of the tie-breaker provision of an income tax treaty.
Hi, and welcome. I'm Scott Shaughnessy here with Bob Rothery to talk with you today about expatriation and what it means for international assignees in the United States with permanent resident status―in other words, green cards―when they decide to give up that status, leave the United States and return to their home countries.
But before we get into that, Bob, I've actually seen in the press recently commentary and reporting on the rise in the number of individuals who are expatriating from the United States. In fact, I think I saw figures that said the numbers expatriating in 2015 rose dramatically as compared with 2014.
Well, that's true. In fact, a Treasury report just announced that in the final quarter of 2015, 1,110 people had expatriated, and that's up from just 502 six years ago.
You know, the number just seems to be growing. If you look at the graph, all told in 2015, the number was just over 4,300. Compare this to just over 3,400 in 2014. So what do you think explains this?
Well, there are a lot of reasons. People expatriate often for tax reasons. Also, the Foreign Account Tax Compliance Act, or FATCA, which created a lot of new asset reporting requirements, encouraged a lot of people to get out from under its net. And some people just simply report that for family reasons or for convenience they'd rather not have that status anymore.
Interesting, well, let's move away from discussion of motivating factors for expatriation and look at the ramifications, and who's expatriating. So we certainly hear of U.S. citizens relinquishing their citizenship and expatriating from the United States. We'll set them aside, and let's focus on those individuals who are considered long-term residents, and giving up that status, leaving the United States and expatriating. What is a long-term resident?
A long-term permanent resident is a person who's had their green card in at least eight years during the past 15. And that year counting can be a little bit complicated, so, really, anybody who's had a green card for at least six years should be thinking about what the impact of these rules might be.
So that I understand under the rules for Section 877, there are certain consequences when a covered expatriate relinquishes citizenship or green card status. What is a covered expatriate?
A covered expatriate is somebody who expatriates who meets one of two financial thresholds; either their average annual income tax liability for the past five years was at least $161,000—that's an annual inflation-adjusted amount for 2016, or that their net worth exceeds $2 million, and that amount is not inflation-adjusted. If a person doesn't certify that they have been in compliance with all U.S. tax regulations for the past five years, they'll be considered a covered expatriate regardless.
There are some exceptions for certain dual-nationals, and in fact, the President's 2017 budget proposes widening some of those exceptions.
I see. It's interesting. We'll see if that budget proposal goes anywhere. So there are set criteria for defining what a covered expatriate is—so let's say we have a covered expatriate who leaves the United States but has investments in the United States, like stock holdings. What happens then?
If a covered expatriate expatriates, then they're subject to a deemed disposition tax. They're treated as if they've sold everything they own on the day before their date of expatriation at its fair market value. And to the extent that there's gain, then they're taxed in their tax return for that year on that gain.
I see, but is there a threshold or an exclusion amount?
Right, I didn't mention that. They're taxed to the extent that that gain exceeds $693,000. That's an inflation-adjusted amount, also.
In addition, you're also taxed on the balance of any tax-deferred accounts, including pensions, 401(k)'s, any deferred compensation, as well as the balance in certain trusts.
Is it possible at all to postpone payment of this tax?
It is―a person can elect to postpone the tax until that asset is actually disposed of. But, in order to do that, they have to post adequate security, and they also have to pay interest, and that can make this election pretty impracticable for a lot of people.
Let's say you are not electing to postpone payment of the tax. How do you determine when to pay the tax? I imagine when, or on what date you expatriate is key here.
That's right. We're looking at the date of expatriation, because that determines the date that we're going to set the fair market value on, and then the year that that date of expatriation falls in is when the tax is due. So there's a formal process for giving up one's green card or for renouncing your citizenship. And when that process is complete, that sets what the date of expatriation is and you can do some tax planning around that. When a person knows what the procedure is, they can set what that date will be.
A few years ago, a high-profile high-tech billionaire gave up his citizenship just a few days before his company went public, and obviously his net worth was much higher when that IPO happened. So if he'd waited just a few days to give up his citizenship, his exit tax would have been much higher.
How lucky for him, although I don't think luck had anything to do with it.
That's interesting, to consider the tax planning aspects around expatriation. I think it's important to note, though, that in addition to the tax implications of expatriation, there are also immigration aspects to expatriation. There are rules around when a person or how a person relinquishes citizenship, gives up permanent resident status, which are stipulated in the Immigration and Nationality Act.
Certainly, and in fact, in 2014, the State Department raised the fee for renunciation of citizenship—it went from $450 to $2,350.
That's quite an increase. I guess they really want people to think twice before they choose to expatriate and seriously consider all the consequences.
In fact, it's really important to do that, at both ends of the process. If a person is contemplating getting a green card, and also if a company sponsors the green card applications of its employees, it's important that people be aware of what the tax ramifications of having a green card and possibly of giving up that green card might be. And certainly, when a person is contemplating giving up their green card, they should consult with both qualified tax counsel as well as an immigration attorney.
Absolutely, I totally agree. This sort of decision and the steps to be followed should not be taken casually or rashly. Well, Bob, thanks so much for being here today. This has been a fascinating discussion.
Well, thank you, Scott.
The above information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.