US citizens living abroad and foreign nationals residing in the US are renouncing their citizenship in a record-breaking fashion. During the first three quarters of 2020, the IRS published 5,045 individuals who have made the ultimate decision to expatriate and formally cut ties with the United States. This amount is significantly higher than the numbers we have seen in the past. In 2019 and 2018, the respective number of expatriates leaving behind their US citizenship was 2,071 and 3,974 individuals.

The Department of Homeland Security publishes key information and statistics detailing the current immigration environment of the US. Reported on an annual basis, the most recent publication suggests this trend may continue further than expected into the future. Statistics show that from the year 2017, there has been more than a 20% decrease in the number of new arrivals migrating into the US that have been granted the status of “lawful permanent residents,” otherwise known as green card holders. The number of individuals entering the United States from foreign jurisdictions is falling. At the same time, we see an increase in the number of US citizens living abroad and giving up their US citizenship. What factors contribute to this shift, and how might you be affected by making a similar choice in the near future?

Historically, tax practitioners have taken the viewpoint that US tax law (FACTA regulations) and the burden imposed on US expats and US foreign nationals by these laws very much explained the shifting desires of US citizenship. Compliance requirements and the increased cost associated with US tax compliance have been one of the key deciding factors of whether or not US citizens consider the option of expatriation for themselves and/or, in most cases, their families also.

Studies show that US tax law is not the only concern of individuals exiting the United States. As a nation this past year, we have experienced unparalleled political uncertainty and a global pandemic that is still shifting life in many aspects from work, to home, to relationship, and moving beyond.

Top Reason Individuals are Exiting the US

  1. Global Pandemic
  2. Political Turmoil
  3. Social Unrest
  4. Proximity to Family and Friends/Business
  5. Economic Opportunity and Stability
  6. Foreign Nation Advancements and Incentives
  7. Reduced Tax Liability and Burden

Expatriation comes with consequences applicable to any individual giving their US citizenship. Examples include but not limited to:

  1. Giving up the right to vote in any US election.
  2. Government protections and assistance while traveling abroad.
  3. Citizenship for minor children born abroad.
  4. Unrestricted travel into and out of the country.

Each of these are examples of non-tax consequences. In the US, the IRS assesses an exit tax on individuals deemed “covered expatriates.” Giving up US citizenship may be a tax-triggering event for some individuals seeking this option. Section 877 and Section 877A govern the tax treatment of any individual expatriating from the United States and deemed by the IRS a “covered expatriate.” These rules apply to all US citizens who have permanently settled abroad and US foreign nationals that have established lawful permanent residency on or after June 17, 2008.  What does it mean to be a “covered expatriate?”

Any US citizen living abroad or any US foreign national residing in the United States will be considered a “covered expatriate” and subject to an exit tax if he or she meets any of the following three tests (exceptions and special rules apply in certain circumstances):

1. Tax Liability Test
Under the first test, an average annual net tax liability exceeding the IRS threshold of $171,000 ($172,000 for 2021), over the five-year period prior to the year of expatriation, deems an individual a covered expatriate for US tax purposes. This amount is adjusted annually for inflation.

2. Net Worth Test
Under the second test, net worth assessed at a value of $2,000,000 or more deems an individual a covered expatriate for US tax purposes.

3. Certification Test
Under the third test, failing to certify, under penalties of perjury, that all federal tax obligations have been met for the five-year period leading up to the year of expatriation deeming an individual a covered expatriate for US tax purposes. The certification will be made on IRS Form 8854, filed with the covered expatriate’s final US tax return.

Worldwide property is deemed as sold at fair market value (FMV) on the day prior to the expatriation date, and capital gains tax will be assessed on the property as a closing procedure to relinquishing US citizenship. The recognized gain is then reduced by the exclusion amount of $737,000 for 2020 ($744,000 for 2021). The remainder will be taxed at a maximum capital gains rate of 23.8%.

If you are giving serious thought to the idea of expatriation, some of the information here may be extremely relevant to your circumstance. We understand every individual holds their own unique reasons for this decision. Our job is to make sure it is done in proper accordance. At KROST, we are here to assist our US-based and international clients through this very important life-changing decision. The services we offer in this area include the following:

KROST Expatriation Services

  • Expatriate tax return compliance
  • International tax planning

    • Inbound/outbound consulting
    • Exit planning strategies.

  • Residency/corporate establishment
  • Net-worth valuation analysis
  • Referral networking and professional collaboration

Our professional tax experts are here to help you with your IRS tax compliance. Contact us today.

About the Author

Evelyn FernandezEvelyn Fernandez, CPA, MST, Principal
Tax, International Tax, Manufacturing & Distribution
Evelyn is a Tax Principal at KROST. She has been in the public accounting profession for over 15 years. Her areas of expertise include tax planning and compliance for high net worth individuals, international entities and individuals, multi-state taxation, partnerships, S corporations, trusts, nonprofit organizations, and entertainment businesses. » Full Bio