By: Anthony N. Verni, Attorney of Law, CPA
Date: August 6, 2024
©2024
PERMANENT LAWFUL RESIDENT PROCEDURES FOR U.S. TAX EXPATRIATION
Any decision regarding expatriation from the United States for tax purposes should include consultation with a tax attorney who is familiar with the rules and procedures related to leaving the U.S. Expatriation can have significant tax implications, and proper guidance is crucial to ensure compliance with all relevant regulations.
The following discussion is limited to Permanent Lawful Residents of the United States (“Green Card Holders”). Those who are removed from the United States under an order for removal or for other reasons will be addressed in a separate blog.
Any decision to expatriate should include: (i) Understanding the Expatriation Rules and the tax implications associated with terminating your long-term U.S. residency; (ii) Meeting the criteria for expatriation; (iii) Filing Form 8854(Initial and Annual Expatriation Statement); (iv) Understanding the U.S. tax consequences; (v) Filing all required tax returns and financial reports and information returns and making necessary return disclosures related to foreign assets or income; (vi) Securing a Certificate of Compliance or other documentation permitting you to legally leave the U.S.; (vii) Taking the necessary steps to terminate your status as a U.S. resident; (viii) Managing any ongoing U.S. tax obligations; (viii) Evaluating the legal and financial implications of expatriation; and (ix) Evaluating political risk assessment for the country you are moving to.
Depending upon the circumstances, all Green Card holders must file either Form 1040-C (U.S. Departing Alien Income Tax Return) or Form 2063 (Departing Alien Income Tax Statement and Annual Certificate of Compliance).
After filing Form 1040-C or Form 2063 and paying any income tax due, the IRS will issue a Certificate of Compliance commonly referred to as a “Sailing Permit.” To obtain a Sailing Permit, you must make an appointment with your local IRS office and appear for an interview.
Forms 1040-C and 2063 both contain a “Certificate of Compliance” section, which certifies that your U.S. Tax obligations have been satisfied. A copy of the signed certificate of compliance included with Form 1040-C or the detached certification from Form 2063 is the Sailing Permit.
The Sailing Permit should be obtained at least 2 weeks prior to, but no earlier than 30 days from the date you plan to leave the U.S.
When filing Form 1040-C you must include all income “received” or “reasonably expected to be received” during the tax year up to an including the date of departure. You must also pay any income tax due at the time of filing. In addition, outstanding income taxes for prior years must be paid.
In preparation for your appointment and to expedite the issuance of the Sailing Permit, it is recommended that you bring the following: (i) Passport and alien registration card or visa; (ii) Copies of your U.S. income tax returns for the past two years; (iii) Receipts for income taxes paid on taxes for the prior two years and those paid with Form 1040-C.(iv) Receipts , bank records, cancelled checks or any other relevant documents that support return deductions, business expenses or dependent claims on the income tax return; (v) A statement from each employer showing the wages paid from January 1 of the current year until the date of departure; (vi) A profit and loss statement if you are self-employed (vii) Supporting documents with respect to the sale of any personal or real property, including capital assets and merchandise; (viii) Documents that qualifies you for a special tax treaty benefit claimed; (ix) Documents verifying your departure from the United States, such as an Airline Ticket; (x) and (xi) Documents verifying your social security number (Social Security Card) or a copy of IRS CP565, reflecting your individual taxpayer identification number (ITIN).
If your income is derived from pass a thru entity, such as a Subchapter S Corporation, Limited Liability Company, Partnership or Trust you should bring copies of the return for the entity (Form 1120S, 1065 or 1041).
Certain aliens are not required to obtain a certificate of compliance from the IRS.
In addition to filing Form 1040-C or Form 2063, a Green Card holder who is not planning on returning to the U.S., intends on surrendering his or her Green Card and has been a lawful permanent resident at least 8 of the previous 15 tax years, must notify the Department of Homeland Security of their termination of residency and file Form 8854 (Initial and Annual Expatriation Information with the IRS).
Depending upon the circumstances you may be subject to tax on the net unrealized gain on your property, calculated on the day before expatriation. You may also be required to file Form 1040 with the income tax paid on Form 1040-C credited against your 1040 U.S. tax liability.
Your residency status is considered abandoned for U.S. tax purposes when you file either Form 1-407 (Record of Abandonment of Lawful Permanent Resident Status) or a letter reflecting your intent to abandon your resident status with the USCIS or a U.S. consular officer.
If mailing, you should file the documents via certified mail with return receipt or the foreign equivalent. You should also retain copies of all filings together with proof of filing and receipt.
Finally, if you receive any U.S. source income after expatriating, you may be required to file Form 1040NR, pay any income tax and/or subject to back up withholding unless you qualify under a treaty provision.
Expatriation for tax purposes is a complex process that requires careful consideration and professional guidance. It’s crucial to consult with a knowledgeable and experienced tax attorney to ensure compliance and manage potential risks effectively.
