We’re seeing a record number of US expatriations in 2020 – 2,909 in Q1 and 2,406 in Q2 (the two highest quarters on record).
Many expatriate to expand their business opportunities. Some expatriate to slash their tax bill.
But a great number expatriate because they are so-called “Accidental Americans” who are fed-up with the cost and complexity of trying to navigate US tax laws and getting nothing in return.
Previously, Accidental Americans often must spend a lot of time, energy, and money to get into tax compliance in order to be able to expatriate – often this would involve the difficult process of acquiring a Social Security number, going through an amnesty program, and paying taxes.
Accidental Americans who expatriate without first getting into compliance are subject to an exit tax and onerous gift and estate tax consequences.
This article discusses a new relief procedure aimed to help Accidental Americans who are looking to expatriate or already have but were not in full tax compliance avoid the adverse tax consequences.
Why Expatriate
Accidental American is the term used to describe people who inherited US citizenship through one of their parents but do not live in America and have few or no ties there – many have never even visited.
Many Accidental Americans do not discover their citizenship status until they’re adults – often, with children of their own.
US tax law is particularly harsh on Americans living abroad – especially those participating in retirement and social programs of foreign nations and those with accounts at foreign financial institutions, like banks or brokerages.
Staying in compliance is extremely difficult and, as a result, very costly.
For many, life gets more difficult after learning of their US citizenship status.
Many Accidental Americans struggle to have their banking and financial needs met due to compliance costs incurred by foreign financial institutions. Many businesses and institutions refuse to do business with Americans due to fears of getting trapped in the US tax system. Investing while living abroad is extremely complicated due to US tax rules.
Problem
Most Accidental Americans have no desire to live or work in America – US citizenship simply brings more headaches and costs than benefits.
The only way out is to expatriate – that is, to give up your US citizenship.
There are two categories of expatriates – covered and non-covered expatriates.
Covered expatriates include individuals who:
- Have an average net income tax liability of the last five years preceding the year of expatriation that exceeds a specified amount adjusted for inflation ($171 for 2020) – also known as the “average income tax liability test.”
- Have a net worth of $2 million or more as of the expatriation date – also known as the “net worth test.”
- Cannot certify, under penalties of perjury, on Form 8854 that they are compliant with all Federal tax obligations for the five tax years preceding the tax year that includes the expatriation date – also known as the “certification test.”
Everyone else is a “non-covered” expatriate – a desirable designation as they can expatriate with great ease and are not subject to the so-called “exit tax.”
Being designated as a “covered” expatriate is undesirable due to the “exit tax” and the harsh US estate tax rules. Expatriation rules require US recipients of gifts or inheritances from covered expatriates to pay a gift or estate tax at the highest possible rate – the ordinary gift and estate tax exemptions do NOT apply.
Many Accidental Americans are considered “covered” expatriates simply because they cannot certify that they are in tax compliance.
In almost every instance this is entirely unintentional – many Accidental Americans are not in tax compliance because they were unaware of their US citizenship status and/or were unaware of the strict and onerous tax compliance demands made of them.
For years, Accidental Americans had to get into tax compliance before expatriating – a time consuming and expensive process that usually involved acquiring a Social Security number and taking part in an amnesty program.
Fortunately, the IRS created a “relief procedure” to simplify and expedite the expatriation process.
How The Relief Procedure Functions
The Relief Procedures for Certain Former Citizens changes the rules for determining if someone is a “covered” or “non-covered” expatriate.
The relief procedure is only available to US citizens with:
- A net worth of less than $2 million at the time of expatriation, and
- An aggregate tax liability of $25,00 or less for the taxable year of expatriation and the five prior years.
If these conditions are met, then someone will not be a “covered” expatriate nor will they be liable for any unpaid taxes and penalties for these or any previous years.
Accidental Americans who have expatriated or are looking to expatriate and take advantage of this procedure must prepare tax returns for the current year and the five prior years and submit them pursuant to the procedure (which is now possible without a Social Security number though might require some assistance from a tax professional).
Result
Because of this relief procedure, many US citizens are able to expatriate more quickly and inexpensively. Many will also save on taxes.
Solution
Esquire Group has helped dozens of Americans through the expatriation process.
Our Founder and CEO, Jimmy Sexton, LLM, is an expatriate himself.
From the financial Xs-and-Os to the emotional aspect of the expatriation process, his expertise and first-hand experience can help you achieve your goals.