IRS Releases Guidance for Expatriates

The IRS has released Notice 2009-85 - Guidance for Expatriates under Section 877A.  Setion 877A applies to (1) any U.S. citizen who relinquishes his or her citizenship and (2) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States for at least 8 taxable years during the period of 15 taxable years before expatriating.  If you fall in either of these categories, this new guidance will apply if: (1) you have an average net income tax liability per year for the five preceding taxable
years equal to $145,000 in 2009; (2) you have net worth of $2 million or more as of the expatriation date; or (3) you fail to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the expatriation date.  There are certain exceptions to the above classification rules.  So, any person seeking to relinquish their US citizenship or their green card needs to understand these new rules before making that decision. 

If you relinquish your citizenship or lawful permanent residency and you are subject to section 877A, you are deemed to have sold your assets for fair market value and are subject to income tax on any gain at the time of expatriation.  In such situations, each person is permitted an exclusion equal to $626,000 for 2009, indexed for inflation.  There are prescribed ways for the exclusion to be allocated to certain assets on expatriating.  Careful analysis is required.  There are also special considerations when you have foreign companies, assets, or are a beneficiary of a foreign trust. 

The requirements and associated guidance on expatriating can be rather complex.  The U.S. government has made it financially difficult to given up your citizenship, and even your green card.