Planning Ahead Before Renouncing U.S. Citizenship

Not everyone who renounces U.S. citizenship is subject to the federal exit tax. However, individuals classified as "covered expatriates" under Internal Revenue Code Section 877A may face significant tax consequences.

Covered expatriate status generally depends on three tests:

• Net Worth Test — Whether your worldwide net worth is $2 million or more on the date of expatriation.
• Income Tax Liability Test — Whether your average annual net U.S. income tax liability for the preceding five tax years exceeds the applicable inflation-adjusted threshold.
• Tax Compliance Certification — Whether you can certify compliance with your federal tax obligations for the five preceding tax years, generally through Form 8854.

Meeting any one of these tests can result in covered expatriate status, although certain exceptions apply.

Covered expatriates may be subject to a deemed sale of worldwide assets, with special rules applying to deferred compensation, retirement arrangements, and certain trusts.

Planning before expatriation is essential. We help clients evaluate covered expatriate status, estimate potential exit tax exposure, and consider available planning opportunities before renouncing citizenship.

 Renouncing U.S. citizenship does not automatically end your federal tax reporting responsibilities. Form 8854, the Initial and Annual Expatriation Statement, is an important part of the expatriation process.

For most individuals expatriating under current law, Form 8854 is used to report information about their expatriation, assets, liabilities, and tax compliance history.

Important considerations include:

• Five-Year Tax Compliance — Generally, expatriating individuals must certify that they have complied with their federal tax obligations for the five tax years preceding expatriation.
• Covered Expatriate Determination — Failure to make the required certification can result in covered expatriate status, regardless of net worth or average income tax liability.
• Financial Disclosure — Form 8854 requires information about worldwide assets and liabilities to assist in determining expatriation tax status.
• Final U.S. Tax Filings — Depending on the circumstances, a final-year Form 1040, Form 1040-NR, and other applicable reporting forms may be required.
• Filing Deadlines — Form 8854 generally must be filed by the applicable due date, including extensions, for the expatriation-year income tax return.

At Barron's International Tax Service, we review prior-year compliance, prepare required tax filings, and assist with Form 8854 to help clients meet their expatriation reporting obligations.

Every expatriation situation is different. Careful planning and a thorough review of your U.S. tax history can help identify potential problems before you renounce citizenship.

Our services include:

• Pre-Renunciation Tax Planning — Evaluating your circumstances and identifying important tax considerations before expatriation.
• Five-Year Compliance Review — Reviewing prior federal income tax returns and international reporting obligations.
• Covered Expatriate Assessment — Evaluating the net worth, income tax liability, and tax compliance tests.
• Exit Tax Analysis — Assessing potential tax consequences involving investments, real estate, retirement arrangements, and other assets.
• Final Tax Return Preparation — Preparing the required expatriation-year U.S. income tax returns and related filings.
• Form 8854 Preparation — Preparing the expatriation information statement and required disclosures.
• Post-Expatriation Tax Guidance — Advising on continuing U.S. tax considerations, including U.S.-source income and applicable withholding requirements.

At Barron's International Tax Service, we provide personalized assistance throughout the expatriation tax process, helping clients make informed decisions and meet their U.S. reporting obligations.