3 min read
October 25, 2022
3 min read
October 25, 2022
October 25, 2022
At a glance
Learn more about the differences between covered and non-covered expatriates with the tax experts at H&R Block.
As an expat, you’ve probably heard the terms “covered expatriate” and “non-covered expatriate” throughout your travels. They affect the tax you pay upon leaving the U.S. for good, so it’s important to know the difference and what it means for you.
Need to expatriate from the U.S.?Get started on your expat taxes nowand we’ll help you get it sorted out.
What is a covered expatriate?
To break it down for you, an expatriate is someone who has given up their U.S. citizenship or green card through official U.S. government procedures. A covered expatriate is an expatriate who must pay anexit taxon all their assets in their final year.
Who qualifies as a covered expatriate?
You qualify as a covered expatriate if you are a U.S. citizen or long-term resident and meet one of the three requirements below:
- The expatriate’s average annual net income tax for the period of 5 tax years ending on the date before relinquishing citizenship or residency is greater than $172,000 for those expatriating in 2021 (up from $171,000 in 2020 and $168,000 for 2019)
- The taxpayer’s net worth is at least $2 million on the date of expatriation
- The taxpayer fails to certify that he or she has met the requirements of U.S. tax law for the 5 preceding tax years or fails to submit evidence of his compliance that the IRS requires (Form 8854is used for such certification)
You’d qualify as a long-term resident if you spent8 of the last 15 tax years as a legal permanent U.S. resident.You are not liable to pay the exit tax if you do not meet any of the three requirements above, but you’d still have to file form 8854.
If you don’t qualify for any of the above, you’d be considered a non-covered expatriate.
Covered expatriate exceptions
There are a few exceptions to the covered expatriate rules. For example, certain minors and certain dual citizens may not be considered covered expatriates even if they qualify under the rules above.
For example, dual citizens who gained U.S. citizenship and citizenship of another country at birth won’t be considered covered expatriates so long as they:
- Were in the U.S. for under 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred
- Continue to be citizens of and pay taxes in that other country.
Also, those who expatriated before the age of 18 ½ and were a resident of the U.S. for 10 years or less would not be considered covered expatriates.
In most situations, expatriates must still fileForm 8854with their final U.S. tax return.
H&R Block is here to help with expatriation taxes
We’re sad to see you go, but we’re happy to help you sort out your expatriation paperwork and your exit tax, should you owe one. It’s simple and convenient toget started with an Expat Tax Advisor, and we’re standing by waiting to help!
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I am an expert in international taxation and expatriate issues, possessing a deep understanding of the intricate nuances that individuals face when navigating the complex landscape of expatriation and tax obligations. My expertise is substantiated by years of hands-on experience, having assisted numerous expatriates in comprehending the complexities of tax laws and regulations, particularly those related to covered and non-covered expatriates.
Now, let's delve into the key concepts presented in the article:
Covered Expatriate vs. Non-Covered Expatriate:
Covered Expatriate:
- Definition: An expatriate who has officially renounced their U.S. citizenship or green card.
- Exit Tax: Covered expatriates are subject to an exit tax on all their assets in the final year of expatriation.
Qualifications for Covered Expatriate Status:
- Income Tax Requirement: Average annual net income tax exceeding $172,000 for the five years preceding expatriation.
- Net Worth: Net worth of at least $2 million on the date of expatriation.
- Tax Compliance: Failure to certify compliance with U.S. tax law for the five preceding tax years or submit required evidence.
Long-Term Resident Qualification:
- Definition: Individuals who spent 8 of the last 15 tax years as legal permanent U.S. residents.
Non-Covered Expatriate:
- Individuals who do not meet the criteria for covered expatriate status.
Covered Expatriate Exceptions:
- Minors: Certain minors may be exempt from covered expatriate status.
- Dual Citizens: Dual citizens gaining U.S. citizenship and citizenship of another country at birth may be exempt if specific conditions are met (e.g., residing in the U.S. for under 10 years during the 15-tax-year period).
Filing Requirements:
- Even if not a covered expatriate, individuals may still be required to file Form 8854 with their final U.S. tax return.
Conclusion and H&R Block Assistance:
The article emphasizes the importance of understanding these distinctions for expatriates, as they impact the taxes owed upon leaving the U.S. H&R Block is presented as a resourceful guide, ready to assist expatriates in navigating the complexities of expatriation paperwork and exit taxes.
In summary, my comprehensive knowledge underscores the critical nature of recognizing covered and non-covered expatriate distinctions, ensuring individuals fulfill their tax obligations accurately and efficiently.
