How to Relinquish Citizenship for Tax Purposes

How to Relinquish Citizenship for Tax Purposes

Before you relinquish your U.S. citizenship in order to avoid paying taxes, be advised that some taxpayers will be subject to an expatriation tax, also known as the “exit tax” upon renunciation of citizenship. The IRS will effectively act as though you sold all of your worldwide assets in a taxable transaction the day before you expatriated.  Long-term capital gains tax rates are currently as high as 23.8%, including the net investment income tax, so plan your expatriation will the help of a tax attorney.

How to Relinquish Citizenship

Both U.S. citizens and green card holders are considered U.S. taxpayers, and each category of taxpayers has different rules for relinquishing their tax citizenship. Citizens must officially relinquish their citizenship, shown by a certificate of loss of nationality or by a U.S. court’s cancelation of a naturalized citizen’s certificate of naturalization.

Green card holders are also U.S. taxpayers, and have different rules for relinquishing “tax citizenship”. A green card holder ceases to be a U.S. resident for tax purposes when:

1.      the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or

2.the individual:

  1. commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country,

2. does not waive the benefits of the treaty applicable to residents of the foreign country, and

3. notifies the IRS of such treatment on Forms 8833 and 8854.

Note that green card holders cannot terminate their tax status by simply failing to renew their green card.

Once one these expatriation events occurs, you will be subject to the exit tax if you are a covered expatriate. This tax applies to taxpayers with over $2 million in net worth or over $162,000 in average income tax liability during the past five years. It also applies if you cannot certify that you are in full tax compliance for the past five years.

Navigating the expatriation process and the potential tax consequences is complicated. Talk to a tax attorney and an immigration attorney before you give up your U.S. passport for good.

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