Taxability Freedom Day: On what day does a “U.S. person” cease to be a “U.S. taxpayer”?

Update: October 9, 2015

This post focuses largely on the role of form 8854 in relinquishing U.S. citizenship for tax purposes. See also my more recent post which discusses the role of the Certificate of Loss of Nationality in relinquishing U.S. citizenship.

 

Introduction …

There is a difference between:

  1. What is your tax liability IF you are a “U.S. person” for tax purposes”;and
  2. Whether you are a U.S. person for tax purposes at all.

I find that many of the blog posts and articles confuse these two issues.

Remember that “U.S. person” for tax purposes INCLUDES (but is not limited to) U.S. citizens and Green Card Holders.

What this post is NOT …

This post is NOT to discuss your specific U.S. tax liability – the AMOUNT of U.S. taxes owing in general. It is NOT to discuss how U.S. taxes are calculated in general. It is NOT to discuss the “taxes that may be triggered” by expatriation. Only those who are “U.S. persons” are subject to U.S. taxation. Therefore, in order to end the “jurisdiction of the United States to impose taxes on you (your “taxability”):

You must terminate your status as a “U.S. person” for tax purposes. This means that you must either “relinquish your U.S. citizenship” under ALL applicable legislation or terminate your Green Card.

What this post IS …

This post is to explain the date that you cease to be a “U.S. person” for tax purposes. At what point, can you say with confidence:

“I’m free. The U.S. no longer has the right to treat me as a “U.S. person” for tax purposes. Nothing that I do from this point on will generate “U.S. tax liability”.

First: The “tax freedom” date for U.S. citizens …

You are treated as a “U.S. citizen” until the date of your “expatriation”. This date of your “expatriation” is determined according to both the expatriation provisions of the Immigration and Nationality Act AND (since 2004) the provisions of the Internal Revenue Code. Since, we are talking “taxation”, the rules of the Internal Revenue Code will govern the issue.

Before the American Jobs Creation Act – June 3, 2004 (before the creation of the “Tax Citizen”)

The date of your “expatriation”was determined solely by the provisions of the Immigration and Nationality Act. There was NO provision under the Internal Revenue Code that stated that you continued to be a “U.S. person” for tax purposes after having “expatriated” under the Immigration and Nationality Act. (This was the date that you relinquished or renounced U.S. citizenship.)

If (you ceased to be a U.S. citizen under the Immigration and Nationality Act) then (you ceased to be a U.S. taxpayer on a prospective basis).

(Possible warning!!! There is a “school of thought” that views the provisions of the 2008 Heart Act as applicable to certain pre-2004 relinquishments of U.S. citizenship. If you “relinquished U.S. citizenship prior to June 2, 2004 you should at least be aware of this Isaac Brock Society discussion. This discussion is based on the issues raised by Virginia La Torre Jeker in the following series of posts:

Part 1 – http://blogs.angloinfo.com/us-tax/2015/03/16/part-i-living-in-the-past-citizenship-relinquishments-am-i-still-a-us-tax-citizen/

Part 2 – http://blogs.angloinfo.com/us-tax/2015/03/23/3123/

Part 3 – http://blogs.angloinfo.com/us-tax/2015/03/30/part-iii-living-in-the-past-citizenship-relinquishments-am-i-still-a-us-tax-citizen/)

June 3, 2004 – June 16, 2008 – The American Jobs Creation Act (after the creation of the “Tax Citizen”)

During this period:

If (you relinquished U.S. citizenship under the Immigration and Nationality Act) then

You continued to be treated as a “U.S. person” for tax purposes UNDER THE INTERNAL REVENUE CODE until you gave “notice” of your “relinquishment” to a government agency. For this period part of the “notice” was filing Form 8854 with the Internal Revenue Service. In other words, there was no way to cease to be a “U.S. person” for tax purposes until you had notified the IRS.

In order to STOP being a “U.S. citizen for tax purposes” Form 8854 had to be filed with the IRS. Without filing Form 8854, you simply continued to be treated as a “U.S. citizen” for tax purposes.

June 16, 2008 – Present – The Exit Tax HEART Act

Since, June 16, 2008:

If (you relinquish U.S. citizenship under the Immigration and Nationality Act) then

You continue to be treated as a “U.S. person” for tax purposes UNDER THE INTERNAL REVENUE CODE until you give “notice” of your “relinquishment” to a a government agency. The “notice” requirement is NOT to the IRS, but to the State Department. (See S. 877A(g)(3) and S. 877A(g)(4) of the Internal Revenue Code.) Once “appropriate” notice is given to the State Department you cease to be a U.S. taxpayer from the date the notice his given (on a prospective basis).

Form 8854 and ceasing to be a “U.S. person” for tax purposes

Form 8854 is a complex form (check it out).  The primary roles it has played have been:

June 3, 2004 – June 16, 2008

The failure to file Form 8854 meant that you continued to be treated as a “U.S. citizen” for tax purposes.

June 16, 2008 – Present

The filing of Form 8854 is NOT a prerequisite to ceasing to be a “U.S. citizen” for tax purposes. Form 8854 is now used to determine whether you are a “covered expatriation” for the purposes of the S. 877A “Exit Tax”.

Regardless of the significance of Form 8854 …

The Internal Revenue Code requires that you file Form 8854 and there is (surprise) a penalty for NOT filing it!

Green Card Holders …

The general rule is that once you have been issued a “Green Card” you are treated as a “U.S. person” for tax purposes until you meet the requirements in S. 877A(g)(3) of the Internal Revenue Code. Those requirements specify that you must meet the requirements in S. 7701(b)(6) of the Internal Revenue Code.  In general this means that a specific action is taken by either the Green Card holder or the U.S. Government:

Action taken by Green Card Holder:

  • File Form I-407
  • Make a “treaty election”

Action taken by the U.S. Government:

It has been judicially or administratively determined that you abandoned your Green Card.

Once the Green Card has been issued you are considered to be a “U.S. person” for tax purposes until the Green Card has been abandoned. I have left the explanation of the rules for Green Card Holders deliberately vague. For those who want more, here is a good Phil Hodgen post on Green Card abandonment.

A final warning …

Expatriations are complex. Get yourself some competence advice!