February 2017 VOLUME 28 NUMBER 2

UN ITED STATES MARC J. STROHL, CPA

GREEN CARD CHECKLIST his article provides a comprehen - LTR is defined as a legal permanent res - tion of motivation so the tax - T sive checklist for a U.S. person pri - ident (“ holder”) whose sta - payer can no longer request a pri - or to renouncing U.S. citizenship or tus was held in at least any part of eight vate letter ruling to avoid the legal permanent residence. It is not of the last 15 tax years ending with the application of Section 877. Notice intended to teach the technical compe - year in which residency ends. 4 Not 2005-36, 2005-1 CB 1007, removed tence required for self-compliance but it counted is any tax year in which the tax - the presumption of will give the knowledge to determine if payer is treated as a tax resident of a for - by the introduction of the “net a U.S. tax preparer knows all that is nec - eign country that has an worth” and “income tax test” and essary to provide technically competent treaty with the U.S. and the taxpayer did the filing of Form 8854. professional services. not waive treaty benefits. Taxpayers that meet these tests after If (1) or (2) above is met, the expa - June 16, 2008, are subject to the Section triation rules will apply and the tax - 877 and 877A expatriation provisions. Expatriation After June 16, 2008 payer will be deemed a “covered Effective June 16, 2008, the Section 877 expatriate”‘ if any of the following (Expatriation to avoid tax) and Form apply: Exceptions 8854 (Initial and Annual Expatriation 1. Average annual net income tax for Exception (effective June 3, 2004, for - Statement) reporting requirements the five years ending before the date ward) to the expatriation rules applies were amended and Section 877A (Tax of expatriation is more than for dual citizens and certain minors 6 responsibilities of expatriation) was $162,000 for 2017. 5 (however, the Form 8854 certification added to the Code. 1 Different rules 2. Net worth is $2 million or more on regarding U.S. federal tax compliance apply to expatriation (1) before June 4, the date of expatriation. for the last five years must still be sup - 2004; (2) between June 3, 2004, and 3. Effective June 3, 2004, forward, the plied). The exceptions are as follows: June 17, 2008; and (3) after June 16, taxpayer fails to certify on Form • Dual citizen. An individual who was 2008, in accordance with Notice 2009- 8854 that he has complied with all at birth a U.S. citizen, is a citizen of 85, 2009-45 IRB 598. 2 U.S. federal tax obligations for the another country and continues to be Expatriation applies to (1) U.S. citi - five years preceding the date of MARC J. STROHL, CPA, is a Principal at Protax Con - zens or (2) long-term residents (LTRs) expatriation. Effective June 3, 2004, sulting Services Inc. in New York (mstrohl@protaxconsult - 3 that have renounced respectively. An there no longer remains a presump - ing.com; www.protaxconsulting.com).

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a resident of that country, where he 2. They furnish the State Department treaty with the U.S. and the individ - is taxed as a resident, and was not a with a signed statement of voluntary ual filed Forms 8854 and 8833 U.S. resident for more than ten of the relinquishment of U.S. nationality (Treaty-Based Return Position Dis - last 15 years. (provided that this is followed by closure Under Section 6114 or • Minors. An individual who expatri - issuance of certificate of loss of 7701(b)). ates before 18 1/ years old and was a nationality). 2 resident of the U.S. for not more than 3. The State Department issues a cer - ten years prior to expatriation. tificate of loss of nationality. Expatriation Tax 4. A U.S. court cancels the certificate of Effective June 17, 2008, in accordance naturalization. with the Heroes Earnings Assistance Effective Date Former LTRs. Former LTRs are con - and Relief Tax Act of 2008 (P.L. 110- An individual is considered to have sidered to have terminated long-term 245, June 17, 2008), Section 877A was expatriated as of the later of the date residency as of the earliest of the fol - added to the Code to abolish the exist - that he relinquishes U.S. citizenship or lowing dates: ing expatriation rules with regard to fil - terminates long-term residency. Effec - 1. They voluntarily relinquish/aban - ing U.S. tax returns (Forms 8854 and tive after June 16, 2008, there is no don their green card by filing 1040NR (U.S. Nonresident Alien longer a requirement to file a Form Department of Homeland Security Income Tax Return) for a period of ten 8854 to establish an effective expatria - Form I-407 (Record of Abandon - years, to be replaced by a one-time tion date. ment of Lawful Permanent Resident mark-to-market tax on the individual’s Former U.S. citizens. Former U.S. Status) with a U.S. consular or immi - net unrealized gain on property over a citizens are considered to have relin - gration officer. specified exemption limit, as of the day quished U.S. as of the earliest of the fol - 2. They became subject to a final before the expatriation date. lowing dates: administrative order for removal These new rules align the U.S. with 1. They renounce U.S. citizenship from the U.S. under the Immigration similar tax rules in other income tax before a U.S. diplomatic or consular and Nationality Act and actually left treaty countries. Accordingly, if individ - officer (provided that this is followed the U.S. uals meet the expatriation rules (“cov - by issuance of certificate of loss of 3. For a dual resident, the country of ered expatriates”), they will now be nationality). new residence has an income tax treated as if they sold (deemed sale) all

DATELINE: U.S. l FEBRUARY 2017 l JOURNAL OF INTERNATIONAL TAXATION 57 of their property for fair market value Mark-to-market exceptions. These on the day prior to the expatriation include: date. The mark-to-market tax is • Eligible deferred compensation imposed on the property’s net unreal - items. ized gain to the extent that it exceeds • Ineligible deferred compensation $699,000 for 2017. 7 items. This exclusion amount must be allo - • Interests in nongrantor trusts. cated to all built-in gain property that is • Specified tax-deferred accounts. subject to the mark-to-market regime Eligible deferred compensation. Section that the covered expatriate owned on 219(g)(5). All basic work-related quali - the day before expatriation, regardless fied retirement plans are subject to 30% of whether the covered expatriate withholding at source and an irrevocable makes an election (see below) to defer waiver of any right to claim any reduction tax with respect to any property. The in withholding under any treaty with the exclusion first must be allocated pro U.S. These plans include profit-sharing rata to each of the built-in gain proper - plans, including Section 401(k)/403(b); ties by multiplying the exclusion by the annuity plans and contracts; simplified ratio of built-in gain per asset over total employee (SEP) plans; simple built-in gains of all assets. The allocat - retirement accounts; foreign pension ed exclusion may not exceed the per- plans; similar retirement arrangements or asset built in gain. If the built-in gains of programs; any item of qualified deferred all assets are less than the total exclu - compensation “substantially vested”; sion, the exclusion is limited to this total qualified or unqualified options; restrict - built-in gain amount. ed stock awards; stock appreciation The exclusion is once per lifetime. rights; and Section 83 property. However, any unused initial exclusion Ineligible deferred compensation. For (subject to a future-year’s inflation any item not covered under eligible adjustment) may be applied to a second deferred compensation, the individual expatriation. is treated as having received the present 1 Gains from the deemed sales must value of the accrued benefits the day Heroes Earnings Assistance and Relief Tax Act of 2008 (P.L. 110-245, June 17, 2008), section 301(a). 2 be taken into account for the tax year of prior to expatriation. Heroes Earnings Assistance and Relief Tax Act of the deemed sale. Deemed losses are Interests in nongrantor trusts (domes - 2008 (P.L. 110-245, June 17, 2008) (expatriation treated under the existing Code and tic or foreign). These are subject to 30% after June 16, 2008); American Jobs Creation Act of 2004 (P.L. 108-357, October 22, 2004), section Regulations. withholding at source and an irrevoca - 804 (expatriation after June 3, 2004). See Liss and Basis step-up. For purposes of ble waiver of any right to claim any Basha, “Expatriation: Opportunities in a Mist of Uncertainty,” 25 JOIT 45 (December 2014). 3 determining the tax imposed, a stepped- reduction in withholding under any Sections 877(e)(2), 877A(g)(2). 4 up basis rule applies to property that an treaty with the U.S. Section 877(e)(2). 5 individual held on the date that he first Specified tax-deferred accounts. For $161,000 for 2016, $160,000 for 2015, $157,000 became a U.S. resident alien (within the these accounts, the individual is treat - for 2014, $155,000 for 2013, $151,000 for 2012, $147,000 for 2011, $145,000 for 2010. 6 meaning of Section 7701(b)). The indi - ed as receiving a distribution of his Sections 877(c)(2) and (3); 877A(g)(1)(B). 7 vidual is treated as having a basis on that entire interest in the account the day $693,000 for 2016, $690,000 for 2015, date of not less than the fair market val - before expatriation. These accounts $680,000 for 2014, $668,000 for 2013, $651,000- for 2012, $636,000 for 2011, ue of the property on that date. Howev - include Sections 408(a) and (b) IRAs $627,000 for 2010, $626,000 for 2009 (from the er, he may make an irrevocable election or annuities (but not Section 408(k) or original $600,000 for 2008 when the law was first implemented). not to have this rule apply, property by (p), Section 529 plans (qualified 8 The step-up rules to a value of not less than fair property, and this rule will not apply to tuition), Coverdell education savings market value exclude real property within the U.S. real property interests and proper - accounts, health savings accounts meaning of Section 897(c) (USRPIs) and property used or held for use in connection with the con - ty held or used in connection with the (HSAs), or Archer medical savings duct of a trade or business within the U.S. Thus, conduct of a trade or business within accounts (MSAs). the basis of such property may not be stepped up under Sec 877(A)(h)(2) unless prior to becom - the U.S. (unless in the latter case the Specific definitions of the items in ing a U.S. resident alien, the NRA was a resident individual was a resident of a U.S. treaty the four categories above are in Notice of a country that had an income tax treaty with the U.S. and that NRA held property for use in connec - country and held the property in con - 2009-85, 2009-45 IRB 598, pages 26- tion with the conduct of a trade or business with - nection with the conduct of a U.S. trade 31. Eligible deferred compensation in the U.S. not carried on through a permanent establishment in the U.S. In that case, under the or business that was not carried on items and interests in nongrantor trusts applicable treaty, the property is eligible for a step- through a permanent establishment in are subject to withholding at source. up in value not less than fair value. 9 the U.S.). 8 Ineligible deferred compensation items See exemption amounts, supra note 7.

58 JOURNAL OF INTERNATIONAL TAXATION l FEBRUARY 2017 l DATELINE: U.S. and specified tax-deferred accounts are Tax Deferral collection of the mark-to-market tax. subject to immediate taxation as spec - An individual may elect by agreement Notice 2009-85 (page 18) addresses these ified above. with the IRS to defer payment of the procedures, with a sample tax deferral In all four cases, Form W-8CE mark-to-market tax imposed on agreement in Appendix A. The covered (Notice of Expatriation and Waiver of deemed sales (interest at the pre - expatriate must attach a copy of the Treaty Benefits) must be supplied to scribed rate would apply). The election deferral request to his tax return that the payors of the items to either is irrevocable and is made property by includes the day before the expatriation inform them of their 30% withhold - property. Form 8854 must continue to date and may file the request simultane - ing responsibilities or request the be filed for all years up to the point ously with the return. The IRS contact present value or value of the individ - where the full amount of the deferred information for all matters pertaining to ual’s entire interest so that the proper tax and interest are paid. Under this the agreement is IRS, SBSE Advisory amount of income may be included on agreement, the deferred tax attributa - Office, 7850 SW 6th Court, Mail Stop the relevant tax return and the result - ble to the property is due at the earlier 5780, Plantation, FL, 33324-3202, phone ant tax paid. No early distribution tax of (1) voluntary payment; (2) due date 954-423-7344. by virtue of Section 72(t) (10% addi - for the return for the tax year in which The covered expatriate also must tional tax on early distributions from the property is actually disposed; or appoint a U.S. agent to accept commu - qualified retirement plans) will be (3) death. nication from the IRS, to permit time - imposed as a result of the above rules. Acceptable security must be fur - ly enforcement and generally facilitate Expatriation tax return. Individuals nished to the Secretary, which includes a implementation. The covered expatri - subject to the mark-to-market tax must bond or other form of security including ate and agent must enter into a binding file Form 1040 or dual status Form letters of credit, conditioned on payment agreement (sample in Notice 2009-85, 1040NR with Form 1040, as appropriate, of the tax due plus interest, and in accor - page 20, Appendix B) to be submitted and attach Form 8854. Once the sale of dance with the Regulation requirements with the deferral request. If the U.S. property occurs, adjustments are made to including being accepted by the Secre - agent resigns or otherwise terminates the gain or loss realized to take into tary. This election is made on Form 8854. its responsibility, the covered expatri - account the gain or loss as deemed under In addition, the individual must waive ate must notify the IRS within 90 days these new mark-to-market rules, without irrevocably any rights under any U.S. at the same address in the paragraph regard to the exemption. 9 treaty that would preclude assessment or above. G

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