US citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated) can use expatriate tax provisions to reduce their tax liability. Form 8854 is used by individuals who expatriated on or after June 4, 2004.
The 2019 Form 8854 has been revised to remove portions of the form related to the reporting and taxation requirements that apply to certain individuals who expatriated before June 17, 2008 (early release draft of an IRS tax form). If you don’t meet any of the three tests to be considered a covered expatriate, you would not be subject to income tax liability for the expatriation tax or exit tax. This is a good thing for your taxes: the expatriation tax can be expensive.
Who Is a Covered Expatriate?
Anyone who meets any of these three tests is a covered expatriate:
- Average annual net income tax liability for the five years prior to the year of expatriation (2018) exceeds $165,000. It is adjusted each year for inflation.
- Net worth exceeds $2 million on the date of expatriation.
- On your initial Form 8854, you fail to certify that you complied with all your federal tax obligations for the five years preceding your expatriation date.
If you meet those, you’re a covered expatriate, unless an exception applies (dual citizenship by birth, dual citizen (Residence) or under age 18 ½).
Form 8854 Instructions & Example
Let’s take for example the situation of John Expatriation. He abandoned his green card in 2018 and completed the I-407 immigration form, or Record of Abandonment of Lawful Permanent Resident Status. He didn’t meet any of the three tests to be considered a covered expatriate.
As far as net worth and assets, he had cash, including bank deposits at his expatriation date, and no liabilities.
The information and Part I portion of John’s Form 8854 will be completed as follows:
Next, John will complete Part IV. This information asks the taxpayer to include the average annual net income tax liability for the five years prior to the year of expatriation, net worth (from part V, schedule A) and if any exception applies for being a covered expatriate.
Part IV will be completed as follows:
Part V Schedule A of IRS Form 8854 asks the taxpayer to report the net worth at the date of expatriation. Cash includes bank deposits in this example.
Part V of Form 8854 Schedule B computes his US source gross income for the part of the tax year that ends with the day before your expatriation date.
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