Important New Rules We Must be Familiar with when we Abandon our US citizenship or Relinquish our Green Card

By Linda L. McCarty, Esq.

The American Jobs Creation Act of 2004 made substantial changes to tax and information reporting rules relating to the relinquishment of a U.S. Green-Card or abandonment of a U.S. citizenship. These changes include penalties for failure to adhere to the new rules.

The following provides a brief summary of the new rules. Given the complexity of these
provisions, it is strongly recommended that you consult an attorney or tax accountant prior to relinquishing your Green-Card or U. S. citizenship.

WHO IS AFFECTED BY THE NEW RULES?

All Swedes who abandon their U.S. Green Cards or U.S. citizenship must be
vigilant of the new tax rules, and although the Expatriation Tax itself only applies
to certain taxpayers (as discussed below) the reporting requirements under the
new rules affect all of us who abandon U.S. Green-Cards or U.S. Citizenships.
The Expatriation Tax provisions under the Internal Revenue Code apply to certain
“long-term residents” who relinquish their green cards and U.S. Citizens who
abandon their U.S. citizenships.

For the purpose of these rules, a “long-term resident” is defined as any lawful
permanent resident (Green-Card holder) who is residing in the U.S. during eight
(8) years of the last fifteen (15) tax years, the 15 th tax year ending with the last
year of residency.

If you are a “long-term” resident or U.S. Citizen and abandon your citizenship or
Green-Card after June 3, 2004, you are subject to the new expatriation tax rules if
any of the following statements apply:

1) Your average annual net income tax liability for the five (5) years
ending before the date of expatriation or termination of residency
is more than a set amount ($127,000 for year 2005);

2) Your net worth is $2 million or more on the date of your
expatriation; or

3) You fail to certify that you have complied with all U. S. federal tax
obligations for the five (5) years preceding the date of your
expatriation or termination of residency.

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WHAT ARE THE NEW REQUIREMENTS FOR ABANDONING A U.S. GREEN-CARD OR ABANDONING A U.S. CITIZENSHIP?

For federal tax purposes, the date of expatriation will be the later of the date the
taxpayer notifies the Office of Homeland Security by filing Form I-407 or the
date Form 8854 is filed with the Internal Revenue Service.

Until both forms havebeen filed, the individual will continue to be treated as a U.S. resident of theUnited States for federal tax purposes regardless of the individual’s status under U. S. immigration laws. Accordingly, until both forms have been filed, the person
will be subject to U.S. income tax on worldwide income and must continue to file
U.S. income tax returns, even though the person may have lost his or her Green-Card
for immigration purposes by failing to return to the United States.

Accordingly, although you are not subject to the expatriation tax rules, you must
still file both forms in order to abandon your Green-Card for tax purposes as well
as immigration purposes.

WHAT ARE THE REPORTING REQUIREMENTS AND TAX LIABILITY IF I AM SUBJECT TO THE EXPATRIATION TAX?

A. Reporting Requirements

If the taxpayer is subject to the expatriation tax, Form 8854 must be filed for the
year of termination of residency or citizenship and for each remaining year of the
ten (10) year post expatriation period, whether or not tax is owed. Failure to file
Form 8854 may result in a $10,000 penalty for each failure, unless it is shown that
such failure is due to reasonable cause. In addition, the taxpayer must continue to
file a U.S. tax return (1040NR) for the ten (10) year period.

B. Additional Tax Liability

Expatriation tax is an alternative tax regime. Under the regime, expatriates are
subject to U. S. income, estate and gift tax on some items, in addition to items on
which U. S. nonresidents are generally liable.

In addition, if an expatriate returns to the United States for more than thirty (30)
days in a year during the ten (10) year period in which the expatriate is subject to
the tax, the expatriate will be treated for the tax year as a U. S. citizen or resident.
This means that the individual will be subject to U. S. income tax on worldwide
income earned in any such year. Estate tax on your worldwide assets will also be
imposed during this year.

There are some narrow exceptions to this rule that you
should discuss with your attorney or accountant in order to determine if they are
applicable to your particular situation.

Länkar:

US Citizenship and Immigration Service

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