Expatriation is the act of relinquishing U.S. citizenship and terminating long-term residency.
Section 877A applies to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated) on or after June 17, 2008. Form 8884 is used by expatriates to certify compliance with tax obligations in the five years before expatriation and to comply with their initial and annual information reporting obligations under section 6039G.
Individuals who expatriated for immigration purposes after June 3, 2004 and before June 17, 2008, but who have not previously filed a Form 8854, continue to be treated as U.S. citizens or U.S. lawful permanent residents for U.S. income tax purposes until they file a Form 8854. See section 7701(n), as in effect before June 17, 2008. Individuals in this category are subject to section 877 once they file the Form 8854. These individuals should refer to the instructions accompanying the 2018 Form 8854 and should use the 2018 Form 8854 (but modify the year on the form by crossing out 2018, and entering the year of actual filing) for purposes of filing their initial and/ or annual expatriation statements pursuant to section 877 going forward. Individuals who expatriated before June 17, 2008, who have previously filed a Form 8854, but who still have an annual reporting requirement in 2019 under section 877 should also use the 2018 Form 8854 but modify the year on the form by crossing out 2018, and entering 2019.
You must file your initial Form 8854 (Parts I and II) if you relinquished your U.S. citizenship in 2019 or you are a long-term resident (LTR), and terminated your residency status during 2019. You must file your annual Form 8854 (Parts I and III) if you expatriated before 2019 and you:
- Deferred the payment of tax,
- Have an item of eligible deferred compensation, or
- Have an interest in a non-grantor trust.
If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value (FMV) 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 your expatriation. There are Exceptions. These gains from deemed sales are taken into account without regard to other U.S. internal revenue laws. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. However, for 2019, only the net gain over $725,000 is subject to the 877A tax.
You are a Covered expatriate if you expatriated after June 16, 2008, and any of the following statements apply.
- Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $168,000.
- Your net worth was $2 million or more on the date of your expatriation.
- You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.
However, Dual-citizens and certain minors won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) above applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3)
The mark-to-market tax does not apply to the following.
- Eligible deferred compensation items.
- Ineligible deferred compensation items.
- Specified tax deferred accounts.
- Interests in nongrantor trusts.
Instead, Exception (1) will apply provided the amount is subject to withholding at the source and provided that you properly make an irrevocable waiver on your initial filing of this form of any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country and timely notify the payor on Form W-8CE. To timely notify the payor on Form W-8CE you must file the Form W-8CE with the payor on the earlier of: (A) The day prior to the first distribution on or after the expatriation date, or (B) 30 days after the expatriation date.
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 and you must include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date.
In the case of item (3), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date and you must include this amount on your Form 1040 or 1040-SR for the year that includes your expatriation date. See paragraphs (d), (e), and (f) of section 877A.
Item (4) is also subject to withholding at source, and you are treated as having waived any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country, unless you elect to be treated as having received the value of your entire interest in the trust by obtaining a ruling from the IRS to that effect.
Deferral of the payment of mark-to-market tax.
You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property. If you make this election, the following rules apply.
- You make the election on a property-by-property basis.
- The deferred tax on 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.
- The due date of the return required for the year of death.
- The time that the security provided for the property fails to be adequate. See item (6) below.
- 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 that would preclude assessment or collection of any tax imposed by section 877A.
Long-term resident defined.
You are an LTR 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 status as an LTR ends. In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.
You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant. You generally have this status if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t commenced to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country. You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return. If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be treated as having expatriated as of that date.
If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.
- The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.
- The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).
- The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.
- 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 commenced 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 gave notice to the Secretary of such treatment on a Form 8833 attached to a timely filed income tax return. See Regulations section 301.7701(b)-7 for information on other filing requirements if you are such an individual.
You are considered to have relinquished your U.S. citizenship on the earliest of the following dates.
- The date you renounced your 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 your voluntary relinquishment of a 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 a U.S. court canceled your certificate of naturalization.
Exception for dual-citizens and certain minors.
You can qualify for the “dual-citizen” exception described above if you meet both of the following requirements.
- You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.
- You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.
You can qualify for the exception for “Certain Minors” described above if you meet both of the following requirements.
- You expatriated before you were 18½.
- You were 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, there is also a “substantial presence” test.