What Is an Expatriation Tax?
An expatriation tax is a government fee chargedto individualswho renouncetheir citizenship, usuallybased on the value of a taxpayer's property. In the United States, the expatriation tax provisions under Section 877 and Section 877A of the Internal Revenue Code (IRC) apply to U.S. citizens who give up theircitizenship, and long-term residents who end their U.S. resident status for federal tax purposes. Different rules apply, according to the date upon which a personexpatriated.
Key Takeaways
- An expatriation tax is a government fee chargedto individualswho renouncetheir citizenship, usuallybased on the value of a taxpayer's property.
- In the United States, the expatriation tax provisions under Section 877 and Section 877A of the Internal Revenue Code (IRC) apply to U.S. citizens who give up theircitizenship, and long-term residents who end their U.S. resident status for federal tax purposes.
- Expatriation tax rules in the U.S. apply to people who settled abroad permanentlyon or after June 17, 2008.
Understanding the Expatriation Tax
Expatriation tax rules in the U.S. apply to people who settled abroad permanentlyon or after June 17, 2008. These rules apply to anyone who expatriateswitha net worth of over $2 million, fails to certify that they’ve complied with U.S. tax law for the five years preceding their expatriation, or who has an annual net income tax for the five preceding years over a certain amount. This amount changes each year based on inflation, but in 2020 it was $171,000.
Expatriation taxes are not common throughout the world. Only the U.S. and Eritrea charge income tax on citizens who take up residence abroad. Some other countries, such as Canada, have a departure tax for those emigrating to other countries, though this differs from an expatriation tax.
The expatriation tax in the U.S. is based on the value of an individual taxpayer’s property on the day before their expatriation. The IRS takes into accountfair-market valueof taxpayers' property as though taxpayers liquidated their assets, selling all of their property on this day. The difference between the fair market value and what a particular taxpayer paid for a property is a net gain under the tax.Likewise, any losses also are taken into account through the same method. Any gain over $737,000 (2020 limit), a number adjusted regularly for inflation, is subject to tax.
Because many people who expatriate do so to avoid tax laws regarding their assets, the IRS imposes more severe tax implications for expatriates. The expatriation tax does not apply to individuals who prove to the Secretary of the Treasury that their reason for expatriation is not to evade taxes, such as a person with dual citizenship choosing to make another country a permanent residence.
The IRS imposes still penalties anyone who failed to filean expatriation form as required. Covered expatriates must file form 8854. The IRS informs people who do not file this form as required they are in violationand subject to a potential $10,000 penalty.
FAQs
The exit tax is calculated based on the “deemed sale” of an individual's worldwide assets on the day before their expatriation. This means that the expatriate is assumed to have sold all their assets at their fair market value and would be subject to tax on any gains.
What is the definition of expatriate for tax purposes? ›
The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their U.S. resident status for federal tax purposes.
How can I avoid expatriation tax? ›
Avoid Expatriate Status
This is impossible for citizens, but for green card holders, the strategy is to avoid becoming a long-term resident. Leave the United States, and abandon the green card visa before the eighth year of holding that visa status.
How does US expat tax work? ›
Filing taxes as a U.S. expat
The United States subjects your worldwide income to U.S. income tax, regardless of where you live. To make this easier, the Internal Revenue Code offers certain foreign income tax credits, tax deductions, and income exclusions, potentially reducing your U.S. tax bill each year.
How to avoid green card exit tax? ›
Avoid Being A Long-Term Permanent Resident
One way to avoid green card exit tax is by not becoming a long-term permanent resident. If you haven't met the eight out of 15 years yet and want to surrender your green card, make sure to file Form I- 407 or make a treaty election in time.
Who pays expatriation tax? ›
In the United States, the expatriation tax provisions under Section 877 and Section 877A of the Internal Revenue Code (IRC) apply to U.S. citizens who give up their citizenship, and long-term residents who end their U.S. resident status for federal tax purposes.
Who has to pay the US exit tax? ›
Not everyone who leaves the US is required to pay an exit tax. Only US citizens and long-term residents the IRS considers “covered expatriates” are subject to this tax if they renounce their citizenship.
Why do I have to pay US taxes if I live abroad? ›
In general, yes — Americans must pay U.S. taxes on foreign income. The U.S. is one of only two countries in the world where taxes are based on citizenship, not place of residency. If you're considered a U.S. citizen or U.S. permanent resident, you pay income tax regardless where the income was earned.
How much is the expatriation tax? ›
For eligible plans, US expatriates may be subject to a 30% US tax rate on all taxable payments, which is to be deducted and withheld by the payor. In special cases, individuals may be exempt from this tax under certain tax treaties.
What is an example of expatriation? ›
Expatriation is the process of leaving your country and living in a new one, or the act of forcing a person to do this. If you decide to pack up your things and move to the remote island nation of Kiribati, that's expatriation.
The U.S. imposes income tax on the worldwide income of its citizens and “green card” holders1 even if they reside overseas. U.S. citizens and U.S. domiciled persons are also subject to U.S. gift and estate tax on transfers of worldwide assets.
Are U.S. citizens liable for expat tax? ›
Yes, it is mandatory. Despite not owing taxes, US expats are still required to file a US tax return. This is mandatory for all US citizens and green card holders who meet the minimum income thresholds, regardless of where they live or where their income is earned.
Does the IRS go after expats? ›
Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.
Do US expats get taxed twice? ›
The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live or earn their income. This means that American expats are potentially subject to double taxation – once by the country where they earn their income, and again by the United States.
What happens if you don't pay taxes as an expat? ›
The penalty for not filing your tax return is 5% of the amount of tax shown on the return for each month you have not filed, up to 25% of your tax owing. If you fail to pay, the IRS imposes a ½ percent penalty for each month that the amount remains unpaid, up to 25% of your total tax owing.
What is the 8 year exit tax rule? ›
Green Card Exit Tax 8 Years
If a Green Card Holder has been a permanent resident for at least 8 of the past 15 years, they become subject to expatriation tax laws as well. In fact, it does not even require that the green card holder was a permanent resident for the full 8-years — or that they resided within the U.S.
How much tax do you pay as a US expat? ›
Some American expats who work abroad may also need to pay US Social Security and Medicare taxes on their earned income. For example, self-employed US expats and those who work for a US-based employer must file an expat tax return. For the 2023 tax year, the rate for expat employees is 7.65%.
