Publication 519 - U.S. Tax Guide for Aliens

Publication 519

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The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. The rules that apply are based on the dates of expatriation, which are described in the following sections.

Expatriation Before June 4, 2004.
Expatriation After June 3, 2004, and Before June 17, 2008.
Expatriation After June 16, 2008.

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You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits.

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Expatriation before June 4, 2004

If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U.S. taxes. Unless you received a ruling from the IRS that you did not expatriate to avoid U.S. taxes, you are presumed to have tax avoidance as a principal purpose if:

Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or
Your net worth on the date of your action was $500,000 or more.

The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1).

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If you lost your U.S. citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended.

Your U.S. residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits.

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If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect.

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The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section.

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Expatriation after June 3, 2004, and before June 17, 2008

If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply.

Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than:
1. $124,000 if you expatriated or terminated residency in 2004.
2. $127,000 if you expatriated or terminated residency in 2005.
3. $131,000 if you expatriated or terminated residency in 2006.
4. $136,000 if you expatriated or terminated residency in 2007.
5. $139,000 if you expatriated or terminated residency in 2008.
Your net worth is $2 million or more on the date of your expatriation or termination of residency.
You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency.

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Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. However, they still must provide the certification required in (3).

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You may qualify for the exception described above if all of the following apply.

You became at birth a U.S. citizen and a citizen of another country and you continue to be a citizen of that other country.
You were never a resident alien of the United States (as defined in chapter 1).
You never held a U. S. passport.
You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your loss of U. S. citizenship.

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You may qualify for the exception described above if you meet all of the following requirements.

You became a U.S. citizen at birth.
Neither of your parents was a U.S. citizen at the time of your birth.
You expatriated before you were 181/2.
You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation.

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The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation rules would otherwise apply to you.

The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the United States for more than 30 days during the calendar year ending in that year. Instead, you are treated as a U.S. citizen or resident and taxed on your worldwide income for that tax year. You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms.

When counting the number of days of presence during a calendar year, count any day you were physically present in the United States at any time during the day. However, do not count any days (up to a limit of 30 days) on which you performed personal services in the United States for an employer who is not related to you if either of the following apply.

You have ties with other countries. You have ties with other countries if:
1. You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country in which you, your spouse, or either of your parents were born, and
2. You became fully liable for income tax in that country.
You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the date of expatriation or termination of residency. Do not count any day you were an exempt individual or were unable to leave the United States because of a medical condition that arose while you were in the United States. See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843.

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If your employer in the United States is any of the following, then your employer is related to you. You must count any days you performed services in the United States for that employer as days of presence in the United States.

Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).
A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest.
A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock.)
A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable.

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For purposes of U.S. tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions.

You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency.
You file Form 8854 in accordance with the form instructions.

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If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. You must file this form even if you owe no U.S. tax.

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If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form, or include incorrect information, you may have to pay a penalty of $10,000. You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect.

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How to Figure the Expatriation Tax (If You Expatriated before June 17, 2008)

If the expatriation tax applies to you, you are generally subject to tax on your U.S. source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U.S. trade or business.

Table 4-1. Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004
IF you expatriated during . . .	THEN the rules outlined on this page apply if . . .
	Your 5-year average annual net income tax was more than ...	OR	Your net worth equaled or exceeded ...
1999	110,000		552,000
2000	112,000		562,000
2001	116,000		580,000
2002	120,000		599,000
2003	122,000		608,000
2004 (before June 4)*	124,000		622,000
*If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008.

For this purpose, U.S. source gross income (defined in chapter 2) includes gains from the sale or exchange of:

Property (other than stock or debt obligations) located in the United States,
Stock issued by a U.S. domestic corporation, and
Debt obligations of U.S. persons or of the United States, a state or political subdivision thereof, or the District of Columbia.

U.S. source income also includes any income or gain derived from stock in certain controlled foreign corporations if you owned, or were considered to own, at any time during the 2-year period ending on the date of expatriation, more than 50% of:

The total combined voting power of all classes of that corporation's stock, or
The total value of the stock.

The income or gain is considered U.S. source income only to the extent of your share of earnings and profits earned or accumulated before the date of expatriation and during the periods you met the ownership requirements discussed above.

Any exchange of property is treated as a sale of the property at its fair market value on the date of the exchange and any gain is treated as U.S. source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19.

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For more information on the expatriation tax provisions, including exceptions to the tax and special U.S. source rules, see section 877 of the Internal Revenue Code.

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Expatriation Tax

If you expatriated or terminated your U.S. residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. Attach it to Form 1040NR if you are required to file that form. If you are present in the United States following your expatriation and are subject to tax as a U.S. citizen or resident, file Form 8854 with Form 1040.

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Expatriation after June 16, 2008

If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions.

Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than:
1. $139,000 if you expatriated or terminated residency in 2008.
2. $145,000 if you expatriated or terminated residency in 2009 or 2010.
3. $147,000 if you expatriated or terminated residency in 2011.
4. $151,000 if you expatriated or terminated residency in 2012.
Your net worth is $2 million or more on the date of your expatriation or termination of residency.
You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.

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Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. However, they still must provide the certification required in (3) above.

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You may qualify for the exception described above if both of the following apply.

You became at birth a U.S. citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country.
You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1.

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You may qualify for the exception described earlier if you meet both of the following requirements.

You expatriated before you were 181/2.
You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1.

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Your expatriation date is the date you relinquish U.S. citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U.S. resident).

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You are considered to have relinquished your U.S. citizenship on the earliest of the following dates.

The date you renounced U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).
The date you furnished to the State Department a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).
The date the State Department issued a certificate of loss of nationality.
The date that a U.S. court canceled your certificate of naturalization.

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You are considered to have terminated your long-term residency on the earliest of the following dates.

The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status.
The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order.
If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. See Effect of Tax Treaties in chapter 1 for more information about dual residents.

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How to Figure the Expatriation Tax (If You Expatriate after June 16, 2008)

In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date ("mark-to-market tax"). This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. But see Exceptions, below.

Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U.S. internal revenue laws. Losses from deemed sales must be taken into account to the extent otherwise provided under U.S. internal revenue laws. However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. The net gain that you otherwise must include in your income is reduced (but not below zero) by:

$600,000 if you expatriated or terminated residency before January 1, 2009.
$626,000 if you expatriated or terminated residency in 2009.
$627,000 if you expatriated or terminated residency in 2010.
$636,000 if you expatriated or terminated residency in 2011.
$651,000 if you expatriated or terminated residency in 2012.

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The mark-to-market tax does not apply to the following.

Eligible deferred compensation items.
Ineligible deferred compensation items.
Interests in nongrantor trusts.
Specified tax deferred accounts.

Instead, items (1) and (3) may be subject to withholding at source. In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. See paragraphs (d), (e), and (f) of section 877A for more information.

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Expatriation Tax

If you expatriated or terminated your U.S. residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms.

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You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. If you make this election, the following rules apply.

You can make the election on a property-by-property basis.
The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property.
Interest is charged for the period the tax is deferred.
The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates.
1. The due date of the return required for the year of death.
2. The time that the security provided for the property fails to be adequate. See item (6) below.
You make the election on Form 8854.
You must provide adequate security (such as a bond).
You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax.

For more information about the deferral of payment, see the Instructions for Form 8854.

Previous Page | Table of Contents | Top of Page | Index | Next Page Right Arrow

Expatriation Tax(p21)

Long-term resident defined.(p22)

Expatriation Before
June 4, 2004(p22)

Reporting requirements.(p22)

Expatriation tax. (p22)

Expatriation After
June 3, 2004, and Before
June 17, 2008(p22)

Exception for dual-citizens and certain minors.(p22)

Tax consequences of presence in the United States.(p22)

Date of tax expatriation.(p22)

How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008)(p23)

Other information.(p23)

Expatriation Tax Return(p23)

Expatriation After
June 16, 2008(p23)

Exception for dual-citizens and certain minors.(p23)

Expatriation date.(p23)

How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008)(p24)

Exceptions. (p24)

Expatriation Tax Return(p24)

Deferral of payment of mark-to-market tax.(p24)