Form 8854 Requirement When Renouncing US Citizenship

When you’ve settled in a foreign country and built a life there, the question of whether retaining your US citizenship is worthwhile may arise. This is due to the fact that the IRS taxes citizens and Green Card holders on their global income, which often results in filing daunting expat returns year after year. Moreover, US expat returns tend to increase in complexity as time goes on due to milestones. The acquisition of international property and/or other foreign investments, marriages, and the births of children can all increase the complexity of a US expat tax return.

For those who obtain citizenship in another country, relinquishing your US passport may seem like a logical next step. However, it is crucial to be well-informed about the tax consequences associated with surrendering your Green Card or passport, and this process begins with understanding Form 8854.

To help you navigate this topic effectively, we’ve compiled the following information.

Who needs to file Form 8854?

Anyone seeking to renounce their US citizenship or Green card must file this form. You can file Form 8854 as an initial filing (if you’ve never filed it before) or as a subsequent annual filing. 

Initial filing

You’ll need to make an initial filing of Form 8854 for the year you: 

• relinquish your US citizenship, or 
• give up your Green Card after being a resident for 8 of the last 15 years.¹

Subsequent filings

There are cases where you may need to file subsequent Forms 8854. Specifically, if:

• You deferred the payment of expatriation tax, or
• You have eligible deferred compensation at the time of expatriation, or
• You are a beneficiary of a non-grantor trust when you expatriated.²

What is IRS Form 8854: Initial and Annual Expatriation Statement

Form 8854, also known as the Initial and Annual Expatriation Statement, is the five-page form the IRS requires you to file after giving up your US citizenship or long-term residency. 

Its primary purpose is to confirm your compliance with federal tax obligations for the five years preceding your expatriation.

It also helps the IRS determine who’s a covered expatriate (more on that later) and possibly subject to an expatriation tax. 

Form 8854 has three parts.

Part I

The first part of Form 8854 is where you fill in general information such as:

• Mailing address
• Country of tax residency
• Date of expatriation
• List of citizenships

Everyone required to complete Form 8854 must fill in Part 1.

Part II

Recall that there are initial filers and subsequent annual filers of Form 8854.

And Part II is for the initial filers. 

You make an initial filing of Form 8854 for the year of your renunciation of US citizenship or the year after you give up your long-term Green Card.

This means if you renounced your US citizenship in 2023 or gave up your Green Card, the IRS will require you to make an initial filing of Form 8854 for the 2023 tax year, which you’ll file in 2024.

If you’re making an initial filing, you must fill out Part I and Part II of Form 8854.

Part III

In certain situations, you may initially file Form 8854 and still need to file Form 8854 in subsequent years. 

If you defer paying your exit tax, you must make subsequent annual filings.

If you also have deferred compensation (e.g., stock options) on your expatriation date or are a beneficiary of a non-grantor trust, you’ll need to make subsequent annual filings. On these annual filings, you must fill out Part I and Part III of Form 8854.

How the IRS determines whether you’re a covered expatriate

Put plainly, a covered expatriate is a citizen or a long-term permanent resident the IRS considers wealthy enough to collect taxes from when they give up their citizenship or Green Card.

The IRS considers you a covered expatriate if any of the following conditions apply. 

• Your average annual net income tax liability for the five tax years ending before the date of expatriation is more than $178,000, or 
• Your net worth was $2 million or more on the date of your expatriation, or 
• You fail to certify on Form 8854 that you have complied with all federal tax obligations for the five tax years preceding the date of your expatriation.³

What is the exit tax?

The US imposes an exit tax on covered expatriates. This tax is designed as a capital gains tax against unrealized capital gains. But what does that mean?

The US exit tax is calculated based on the “deemed sale” of the individual’s worldwide assets on the day before the expatriation date. In other words, the IRS treats you as if you sold all your property and realized all gains the day before you expatriated. 

However, the first $767,000 of capital gains is excluded from exit tax. Any gain above this amount is taxed.

Keep in mind the exit tax also applies to:

• deferred compensation (such as pensions and employee stock options)
• certain tax-deferred accounts (such as 529 plans and Health Savings Accounts), and 
• interests in non-grantor trusts (this may include a trust set up for you by a relative).

While an exit tax can seem punitive for leaving the US, with the help of a professional in expat taxes, you can save money and reduce your tax bill.

Form 8854 instructions

The instructions clarify who must file Form 8854 and when to file it. In addition, “Specific Instructions” explains how to complete each line of the form. 

They also include changes to the inflation-adjusted covered expat tax liability threshold and the exit tax exemption amount.⁴

But that said, it is inadvisable to file this form without the help of tax experts who are experienced in renunciations. 

Is renouncing US citizenship or your US Green Card the right choice for you?

It’s common to run into tax complications when living abroad as a US expat. However, renunciation isn’t your only option, although it can feel like it if Uncle Sam taps you unexpectedly. For example, it’s quite common for longtime expats to be unaware of their filing obligations and realize years down the road that they’re behind on filing their taxes. In situations like these, it’s perfectly natural to panic and wonder if you should renounce your citizenship to make it all go away – but there are other options if you need to catch up on your taxes.

Renouncing citizenship should be considered one option among many on the menu of choices you have to most effectively navigate your life as a US expat. And, with the help of a US expat tax expert, you can create a multi-course meal that satisfies the IRS while minimizing the cost of the gourmet affair to yourself.  

References

1. Initial filing requirements for Form 8854
2. Subsequent filing requirements for Form 8854
3. Covered expatriate criteria
4. Download Form 8854