Relinquishing Permanent Residency or U.S. Citizenship

29 May

United States border at Naco, Mexico - U.S. Citizenship

United States border at Naco, Mexico

The expatriation rules apply to U.S. citizens or long term residents that have a Green Card in eight of the last fifteen years preceding the application for expatriation. The expatriation rules are applicable if the taxpayer meets one of two test. A “covered expatriate” is a taxpayer that meets the Net Worth Test of IRC Sec 877A(g)(1) of $2 million or more.

Alternatively, under the Tax Liability Test, the expatriation rules apply if the taxpayer’s tax liability for the five years preceding the year of expatriation exceeds $160,000 in 2015. Regardless of the application of the preceding two rules, under a third test, the Certification Test, the expatriation rules apply if the taxpayer fails to certify that the taxpayer is compliant with all of his federal tax obligations on Form 8854. The non-compliant foreign investor who become a U.S. resident or citizen and is hiding a mountain of cash in the Cayman Islands may have a difficult time certifying compliance.

The rules are not applicable to taxpayers who became dual citizens at birth. The taxpayer must have remained a dual citizen of both countries. The second exemption applies to taxpayers who expatriate before age 18 1/2 who did not qualify as a U.S. resident under the substantial presence test for more than ten years prior to the year of expatriation.

IRC Sec 877A subjects a covered expatriate to an exit tax on the net unrealized gain with respect to all worldwide property when the taxpayer terminates U.S. citizenship or permanent U.S. residency. The property is deemed sold on the day before expatriation occurs and exceeds an exemption threshold of $690,000 in 2015. In the case of a grantor trust, trust assets are subject to the mark-to-market rules. Beneficial interests in a non-grantor trust are exempt from taxation.

The exit tax base is predicated on the fair market value of all property. The taxpayer is able to adjust his tax basis on each item subject to the deemed sale to its FMV on the expatriation date. A covered expatriate may defer the payment of the exit tax in exchange for providing security to the IRS that satisfies IRC Sec 877A(b)(4). The taxpayer irrevocably waives any treaty benefits that might otherwise preclude a tax assessment. Interest accrues at the normal underpayment rate of IRC Sec 6621.


The world is a pretty unsafe place with uncertainty lurking in every corner of the globe. Flexibility is always a prudent posture whenever possible. A number of countries have investor programs to attract foreign investment. One of the problems is the high investment threshold. A second problem is the quota system on investor visas. The weather in Canada is too cold and I personally cannot imagine a Latin American moving to Australia. It is hard to learn English already without the Australian accent.

The bottom line is that everyone still wants to live in the United States permanently or at least part of the time. Immigration has become a politically sensitive topic and regardless of the political persuasion, no one objects to the foreigner who comes and starts a business that creates jobs. The EB5 annual cap is currently limited to 10,000 visas per year and Chinese nationals are taking 85-90 percent of those visas. The investment minimum and program requirements are limiting to everyone except the rich and famous.

The E2 Investor visa is a much more flexible visa program without the negatives of EB5 from an investment standpoint and without getting locked into U.S. taxpayer status as a U.S. resident. The Panamanian Second Passport Program makes the E2 visa open to investors who come from countries without the benefit of a treaty for E2 visa purposes.

Part 1 of a 3 Part Series

Gerald Nowotny

Law Office of Gerald R. Nowotny
266 Lovely Street
Avon, CT 06001
United States


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