You can expatriate yet be a "resident alien" afterwards.
- do not assume that your expatriation date is the first day of the rest of your life, free of the U.S. tax system; and
- you might have extra paperwork to do (e.g., Form 8840 ) in order to establish the cutoff date for when you stopped being a U.S. taxpayer.
What makes an alien?
A person who is subjected to the full brunt of U.S. income tax laws will be one of two things:
- A U.S. citizen; or
- A "resident alien".
An
"alien" is simply a person who is not a U.S. citizen. This means that a
"resident alien" is simply a noncitizen who somehow becomes a
"resident" of the United States.
There are three ways you can become a "resident alien".
- One way is by getting a green card visa; we will ignore this method because someone who expatriates by definition is shedding this type of visa.
- Another way is by spending too much time in the United States over a three-year time period.
- A third way is by deliberately choosing to become a U.S. taxpayer.
You
are taxable on all income if you are a citizen or resident alien. You
are only taxable on your U.S. income if you are a nonresident alien.
Deliberate choice
Take the situation of a U.S. citizen married to another U.S. citizen. One of them decides to renounce U.S. citizenship.
Yet the expatriate can elect to be a U.S. taxpayer again after expatriation. An election is available to those who are nonresident aliens on December 31, and are married to a U.S. citizen or resident. See 26 U.S.C. §6013(g)(2), which says:
Yet the expatriate can elect to be a U.S. taxpayer again after expatriation. An election is available to those who are nonresident aliens on December 31, and are married to a U.S. citizen or resident. See 26 U.S.C. §6013(g)(2), which says:
This subsection shall be in effect with respect to any individual who, at the close of the taxable year for which an election under this subsection was made, was a nonresident alien individual married to a citizen or resident of the United States, if both of them made such election to have the benefits of this subsection apply to them.
People
do this so they can continue to file a joint income tax return. There
are some other cool tricks that the election allows you to do, too. (One
of these involves nonrecognition of capital gains for interspousal
transfers of property under Internal Revenue Code Section 1041. Saves
tax and brain damage for U.S. citizens married to noncitizens.)
Anyone
making this election is deliberately intending to dive head-first into
the pool and become a U.S. taxpayer. There is no mystery here about
which tax return to file and what is taxable.
The substantial presence test
The
second way to become a resident alien after expatriation is to use the
"too many days" method. The IRS calls this the "substantial presence
test". Let us say that you are a U.S. citizen and you are in the United
States until October 31, 2015. You fly out and renounce your citizenship
the next day.
You
have overstayed the "number of days" you can be in the USA and are a
resident alien. For the early part of the year (until October 31, 2015)
you were a U.S. taxpayer because you were a citizen AND you met the
substantial presence test. After October 31, 2015, you are a U.S.
taxpayer only because of the substantial presence test.
What
that means for someone who is expatriating in 2015 is simple: in order
to truly know what tax return you are going to file in 2015 when you
expatriate (Form 1040 or 1040NR), you will need to look at the number of
days that you are physically in the USA in 2013, 2014, and 2015.
Here
is the formula. Take the 2013 days in the USA and divide by six. Take
the 2014 days in the United States and divide by three. Add these two
numbers to the number of days you are in the United States in 2015. Is
the total 183 or more? Then you are a resident alien for at least part
of calendar year 2015 -- the year you renounce your citizenship or give
up your green card.
Some counterstrikes
It
isn't quite that simple, however. Your final day of resident status in
the United States for tax purposes might not be December 31. There are
special rules hard-wired into the Internal Revenue Code for you to look
at before you can predict with certainty what your last day of resident
alien status will be. Look at these rules in the Code to see what you
can do:
- Internal Revenue Code Section 7701(b)(2)(B), which describes a way to establish a cut-off date as of your last day of physical presence in the USA or the last day you held a green card;
- Internal Revenue Code Section 7701(b)(2)(C), which allows you to disregard some days of presence in the USA;
- Internal Revenue Code Section 7701(b)(3)(C), which completely trumps the substantial presence test if you go over the magic number of 183 when doing the math over three years, but you were in the USA for under 183 days in the current year;
There
is another method, not in the Internal Revenue Code, that might work.
Look for an income tax treaty. Can you claim nonresident status in the
United States under the provisions of the income tax treaty between the
USA and your home country? If so, use Form 8833 to make this happen.
MOTS
The
Moral of the Story is simple. For those of you who expatriate and have
few or no days of presence in the United States in the current and two
prior years, life is simple. The expatriation date is almost certainly
going to be the first day of nonresident status for U.S. income tax.
But
for those of you who have spent a lot of time in the United States, it
will be important for you to understand the full impact of the rules so
you know whether you are filing Form 1040 or Form 1040NR, or if you are
filing a dual status tax return (part Form 1040NR, part Form 1040). And
if you are filing a dual status tax return, you will need to compute the
magic date on which you flipped from resident to nonresident status.
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