For centuries, people from all over the world, have flocked to the new world, known today as the United States of America, in search of freedom and a better life. This dream still exists today in the hearts of Indians also, who have taken the steps to realize their dreams. So, when an American Indian renounces or surrenders his/her citizenship or green card, it leaves a question in the minds of the third person as to why. However, the answer can be easily understood by every citizen in the world; Taxes. Let’s explore why many US expats and American Indians are renouncing their US Citizenship or Surrendering their Green Card.
Since the implementation of FATCA and FBAR, many U.S. expats and green card holders have been subject to complying to the tax regimes of their respective resident country and those of the U.S. This led to a number of U.S. expats and green card holders, residing abroad for extended periods of time, renouncing their U.S. citizenship or surrendering their green card. A major contributing factor to the decision being taken is following the complicated tax regimes of two countries. However, before surrendering your citizenship or permanent residence status in the U.S., the repercussions need to be understood carefully and the exit from the U.S. residency planned carefully to avoid further taxation or future taxation, also known as the “Exit Tax”, which is applicable to covered expatriates.
If a U.S. Citizen decides to renounce his/her citizenship, he/she is liable to the “Exit Tax” which was enforced in 2008. As a covered expatriate, on the day before renunciation, the renouncer is deemed to have sold all his/her property at fair market value and is taxed on the deemed gains. Moreover, a renouncer is a covered expatriate, if his/her net worth exceeds $2,000,000 or more and has a net tax liability of more than $162,000 for the past five years from the date of renunciation. For green holders the exit tax is also applicable, however, they must first qualify as lawful long-term residents.
Green card holders are subject to different rules, one of them primarily being the number of years his/her green card is held. To surrender your green card, you must have a long-term resident for at least eight years in the fifteen-year duration. If during the eight years you were a resident of another country and did not waive the treaty benefits of the foreign country, then you are not a lawful long-term resident of the U.S. To surrender your green card the proper paperwork (Form 1-407) must be filled out with IRS so that you are no longer taxable in the U.S. However, before being free of the laws of the U.S. the Exit Tax laws will be applicable to both U.S. citizens and eligible Green card holders.
The Exit tax as per the section 877A of the Internal Revenue Code (IRC), which came into effect on June 16th, 2008 states that individuals will be subject to the tax if:
And if any one of these is true:
Compliance Test – For the previous five years the individual renouncing fails to meet all the requirements set by the IRS.
Net Worth Test – The net worth is greater than $2,000,000 on the date of expatriation.
Tax Liability Test – If the taxable annual income exceeds $162,000 for the past five years from the date of renunciation.
Once these conditions are met and the proper paperwork filed, the proper authorities must approve your request for expatriation. For U.S. citizens the U.S. department of state will issue a certificate stating “Loss of Nationality”. For Green card holders, he/she will lose his/her status on the date of expatriation. Additionally, if a green card holder signs or requests a tax treaty in the country he/she wishes to be treated as a resident, then he/she loses his green card status in the U.S. on the date the treaty is raised. However, if you are not a covered expatriate, then you do not need to worry about the Exit Tax.
To avoid double taxation, all world-wide property held by the expatriate is taxed at fair market value, on the last day he/she is an U.S. citizen, incase if/when the property is sold. However, the initial $699,000 is non-taxable. This rule is applicable for each person expatriating. This limit is for individual person so if the spouse is also surrendering the green card then he/she also gets an additional $699,000. This means that if both are surrendering their Green Cards, then two form 8854 need to be filed and both will get the exemption of $699,000 each.
Expatriates can opt to defer the payment due on mark-to market tax on the deemed sale of property. Interest will be charged until the property is sold and the option to defer is irrevocable. However, deferral has consequences, as even if the gain is less than $699,000, interest is levied. Moreover, if there are family and friends living in the U.S. any gifts to them(from the covered expatriate) would be taxed and at the highest rate, which they will have to pay.
Retirement plans, education savings accounts, health savings accounts etc., are treated as specified tax deferred accounts. The withdrawal of these accounts will not attract penalties, but taxes will be reflected on the final amount.
Leaving the “New World” by the process of expatriating is a complex procedure, one that requires careful planning. To avoid the Exit Tax and taxation pit falls, expert advice and planning is required the with investments, property and the savings held by the expat. Careful consideration is required to see if expatriation is the best option available to you.
Relieve yourself of understanding the complex taxation of being residents of two countries. Enlist the aid of the experts at H&R Block India to ensure, your taxes are filed properly utilizing all the tax savings options available to you.