The tax system of the United States is quite distinct from the rest of the world. There are many peculiar factors about the tax regulations of the country, which all citizens must know.
Expat taxation or Expatriation tax laws stand as the most intricate part of the overall US tax system. The Expatriation tax in the form of tax applicable to expatriates or migrants.
Who are Expatriates?
Expatriates are people who relinquish the tax residency of their country and move to a foreign nation. Many of us know that the US is among the handful of countries that tax its citizens’ world income. So, even if you are now permanent residents in a foreign country but originally hail from the United States, the IRS might knock on your door. The primary purpose of implementing stringent expat laws in the US is to discourage high net worth individuals from migrating from the US to avoid increased tax liabilities. There is the availability of an option for many migrants who want to give up their US citizenship to exit the tax liabilities of the IRS officially. It is possible through an official declaration in Form 8854.
Let us look at the critical points to remember for US individuals who plan to move to another country and the need for filing Form 8854.
Are you liable for Expat Tax?
The general rule for expat tax makes citizen-based taxation enforceable in the US. As per the IRS regulations, US citizens residing abroad will have to comply with the tax requirements of the US taxation system. The clutches of expatriate tax also include long-term American residents or green-card holders to remain liable for tax compliances in the US. These expats will have to total their foreign income and any US income to determine their tax liability.
Any American residing in a foreign country can get Form 1099 from the IRS if he has earned income in the US. Many expatriates from the US may not have to pay taxes to the IRS. It is possible due to the availability of the provision of Foreign Earned Income Exclusion and Foreign Tax Credit. Expatriates from the US can use some methods to avoid double tax on their income and lower their US tax obligations. They include:
There are specified filing requirements that expatriates need to comply with even if their total world income exceeds the stated threshold limits. There are different forms and returns which expats may have to file with the IRS. Filing form 8854 is one such integral aspect about which all American expatriates must know.
What is the significance of Form 8854 for US Expats?
Over the past decade, the number of people who are expatriating from the United States is continually rising. IRS Form 8854 is a form that is required to be filed by US individuals who migrate abroad on or after June 4, 2004. The form is an official certification from an expat individual to the IRS showcasing that he has formally exited from the IRS tax system. Through this form, an expat declares that he has fulfilled all US federal law compliances in the last five years preceding his expatriation’s date.
IRS has outlined that any person who wants to renounce his US citizenship or close his long-term residential status in the US may have to pay an exit tax.
What is Exit Tax?
The exit tax is a form of tax that IRS levies on the value of “built-in” increase of the expat’s property. To impose an exit tax, a notional gain has to be calculated. The notional income is estimated with the assumption that the expat’s property shall be sold at the Fair Market Value (FMV) on the day preceding to the date of expatriation. However, the appreciation in value comes under the net of exit tax if the notional gain after adjusting inflation value has to be more than $600,000.
The IRS can also impose a section 2801 tax on individuals who expatriate from the US.
What is Section 2801 Tax?
As per section 2801 of the Internal Revenue Code, IRS can apply a tax on the value of gifts and bequests given by covered expatriates who have relinquished their American citizenship. The recipient of such gifts or bequests in the US can also become liable for the tax. The tax amount shall be equal to the value of gifts or bequests from a covered expat multiplied with the maximum rate of estate tax applicable on the date of receipt of the gift.
An exit tax and section 2801 tax is mostly imposable on a covered expatriate.
What is the meaning of a covered expatriate?
A covered expatriate is an individual expat from the US who meets any of the following conditions that the IRS has declared:
Thus, filing form 8854 is integral for expats who want to avoid undue tax consequences and penalties from the IRS.
Is there an Amnesty Program introduced by the IRS for the non-filers of Form 8854?
As discussed before, Form 8854 is the official declaration accepted by the IRS, which explicitly states that a person who is renouncing his citizenship of the United States has complied with all the tax regulations. All persons who are considering moving abroad must thoroughly look into the filing requirements of form 8854.
Existing expats from the US who have defaulted in filing the form 8854 must look to make amends for their past non-compliance. It is essential to consider such amendments to avoid the imposition of any penalties or criminal liabilities.
Relief Procedures for Certain Former Citizens
The IRS has also placed a new Amnesty Program for defaulters called “Relief Procedures for Certain Former Citizens.” The scheme gives individuals from the US who have renounced their long-term residential status or citizenship and have not complied with the return filing requirements in the last five years the opportunity to start compliance with the required regulations. Using the amnesty program, US individuals can make voluntary disclosures and file their returns with the IRS. Thus, they can avoid the imposition of exit tax and other legal penalties.
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