Overview of the US Expatriate Tax

Expatriate tax is the tax imposed on all US citizens who renounce their American citizenship, as well as permanent resident aliens who either renounced their status or allowed it to lapse. The tax was originally implemented in 2004 and amended in 2008 under the HEART act. The tax is levied under the assumption that wealthy US citizens and permanent residents chose to expatriate in order to avoid paying US taxes. Under the current version of the law, they are taxed on losses and gains from the sale of their assets, as well as benefits from their deferred compensation plans. 

Understanding Expatriation

US citizens can renounce their citizenship any time they want, provided they do it on their own free will and complete all the necessary paperwork. Permanent resident aliens can revoke their status voluntarily, but they can also automatically lose it if they were convicted of a sufficiently grievous crime, established permanent residence in some other country, stayed outside the United States borders for more than 365 days or failed to file an income tax return. Losing citizenship or permanent resident status is known as expatriation, and the individuals in question are known as expatriates.

Expatriation Tax Overview

The expatriation tax works somewhat differently depending on the date of expatriation. Citizens and permanent residents who expatriated between June 3, 2004 and June 16, 2008 are subject to the original version of the tax, while anyone who expatriated after that is subject to the amended version of the tax.

Original Expatriation Tax

Under the original law, expatriate citizens and permanent residents are subject to the expatriation tax if their net worth is at least $2,000,000 and payed at least $127,000 in taxes during the year they expatriated. They are required to certify that fulfilled all their tax obligations during the past five years.

The expatriates are taxed on any profits they made from selling or exchanging their property, stocks or debt obligations. For tax purposes, the exchange of the property is treated as the sale of the property at it's free market value. Expatiates are subject to all US taxes on their worldwide income during the first ten years following their expatriation if they maintained substantial presence in United States. "Substantial presence" is defined as staying within United States borders for more than 30 days in a row. If they don't work for a related employer, that limit is extended to 60 days. The related employer is an employer controlled by any members of their families, as well as any employer they have ownership stake in.

Expatriation Tax Under HEART Act

Under the amended version of the law, expatriates are subject to expatriate tax if they meet at least one of the following benchmarks:

  • Average income tax benchmark--the expatriate paid an average of more than $139,000 over the course of 5 years prior to the year of their expatriation.
  • Net worth benchmark--the expatriate's net worth was at least $2,000,00 on the date of his or her expatriation.
  • Certification benchmark--the expatriate failed to certify on Form 8854 that he or she complied with all U.S. federal tax obligations during the course of five years before the expatriation.