If you have the status of lawful permanent resident of the United States (i.e., you are a “green card” holder), and you reside in the United Kingdom, and you intend to abandon your green card, you should know that by planning may enable you to avoid substantial U.S. income tax upon expatriating.
American citizens and residents are subject to U.S. income tax on their worldwide income. American “residents” for this purpose include individuals residing in the U.S., as well as green card holders residing abroad.
An individual abandons U.S. lawful permanent resident status by mailing his or her green card with a completed Form I-407 to the United States Citizenship and Immigration Services. But such an individual must file Form 8854, Initial and Annual Expatriation Statement, with his or her final U.S. income tax return. The purpose of Form 8854 is to identify whether the individual is a covered expatriate and, if so, the amount of U.S. income tax, if any, he or she incurs upon expatriating.
A “covered expatriate” is deemed to have sold his or her property, except deferred compensation plan interests, on the day before expatriating. If the deemed sale results in a net loss, the covered expatriate recognizes it on his or her final U.S. income tax return. If the deemed sale results in a net gain, the covered expatriate recognizes it, to the extent it excludes an exclusion amount. The exclusion amount is indexed annually for inflation. For 2020 expatriations the exclusion amount is $737,000.
A covered expatriate is not deemed to have sold his or her deferred compensation plan interests. In the case of an interest in a U.S.-based qualified retirement plan, the retirement plan must withhold and remit to the U.S. Treasury a tax equal to 30% of value of the covered expatriate’s interest in the plan. In the case of any other deferred compensation plan, the covered expatriate is deemed to have received a taxable distribution of his or her interest in the plan on the day before expatriating.
A covered expatriate is a U.S. expatriate who meets any of the following three tests:
- The expatriate’s average annual net U.S. tax liability for the preceding five years exceeds a specified threshold. The specified threshold is indexed annually for inflation. For 2020 expatriations, the specified threshold was $171,000.
- The expatriate’s net worth was $2,000,000 or more on the date of expatriation.
- The expatriate fails to certify to the IRS on Form 8854 that he or she complied with all U.S. federal tax obligations for the five tax years preceding expatriation.
An “expatriate” is U.S. citizen who renounces citizenship, or a long-term resident of the U.S. who abandons a green card. A “long-term resident” of the U.S. is any individual who is a lawful permanent resident of the U.S. in at least eight of the last 15 taxable years. Thus, an individual who abandons U.S. green card after holding it for less than eight of the preceding 15 years is not an “expatriate” and hence not a “covered expatriate.”
For this purpose, an individual is not treated as a lawful permanent resident of the U.S. for any taxable year if such individual is treated as a resident of a foreign country for that taxable year under the provisions of a tax treaty between the U.S. and the foreign county, and does not waive the benefits of such treaty applicable to residents of the foreign country.
The United States-United Kingdom Income Tax Treaty of 2001 (the “Treaty”) provides that, for purposes of the Treaty, a “resident” of a Contracting State (the United States and the United Kingdom are the two Contracting States) means any person who, under the laws of that State, is liable for tax therein by reason of his domicile, residence, citizenship, place of birth, place of incorporation, or any other criterion of a similar nature.
In a real-life example, Henry is a native-born citizen of Greece, and a naturalized citizen of the U.K. He became a lawful permanent resident of the U.S. in 2001. He moved to the U.K. in 2004, and has lived there since. Clearly he is a domiciliary and a resident of the U.K. He abandoned his green card in 2020. For purposes of the Treaty, Henry has been a resident of the U.K. since he moved there in 2004. Therefore, when he abandoned his green card, he was not a long-term resident of the U.S. Hence he is neither an “expatriate” nor a “covered expatriate.”
Therefore, Henry was not deemed to have sold his non-deferred compensation assets or to have received distribution of his deferred compensation assets on the day before he abandoned his green card. This makes sense, as the U.S. ought not tax as a covered expatriate an individual abandoning a green card who has not had a substantial, recent presence in the U.S.
This creates a planning opportunity for a U.K. resident who wishes to abandon his or her U.S. green card. The green card holder could simply make sure that he or she had been a resident of the U.K. and not of the U.S. in eight of the last 15 years, preferably the last eight years, before abandoning his or her green card.
In the meantime, opportunities abound under the Treaty to avoid double taxation. See, for example, Treaty Article 14, paragraph 1, providing that salaries, wages, and other similar remuneration derived by a resident of one Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.
Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.
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