Understanding Covered Expatriates: A Comprehensive Guide for U.S. Citizens

Are you a U.S. covered expatriate? The term may sound daunting, but it's important to understand the specific criteria that define a covered expatriate. This article delves into the details, explaining what it means to be a covered expatriate and the potential tax implications, focusing on the latest information provided by U.S. tax laws.

What Constitutes a Covered Expatriate?

The determination of whether one is a "Covered Expatriate" is a nuanced process that depends on several factors. Notably, if a person is relinquishing U.S. citizenship or long-term resident status, they may be deemed a covered expatriate under certain conditions described in IRS Form 8854. This form requires certain disclosures to avoid triggering penalties and potential taxes due to the loss of U.S. citizenship.

Key Criteria for Being a Covered Expatriate

To determine if one is a covered expatriate, the following criteria must be met:

High Average Income Test: Exceeding an average annual income over the past five years of at least $161,000 (as of 2016) in the expatriation tax year. Net Worth Test: Possessing a worldwide net worth of $2,000,000 or more at the time of expatriation. Tax Compliance Test: Failing to certify tax compliance for the past five years. Properly paying taxes and filing returns is required.

Failing to file IRS Form 8854 in a timely manner can also trigger this status, even if none of the other tests are met.

Rebuttable Situations

There are specific circumstances under which the designation as a covered expatriate can be rebutted:

Dual Citizenship from Birth: A person who was born with both U.S. and another citizenship may not be deemed a covered expatriate. Expatriation of Naturalized Citizens: For U.S. citizens who gained citizenship through naturalization, those who are less than 18.5 years old and became naturalized after age 8.5 may avoid this status.

The U.S. compiles a quarterly list of individuals who have chosen to expatriate. This listing includes individuals who have renounced their citizenship or ended their resident status as defined in IRC (Internal Revenue Code) sections. However, it is important to note that this list is not perfectly accurate and contains contradictions and inaccuracies.

Conclusion: Navigating the Complexities of Expatriation

Understanding the criteria for being a covered expatriate is crucial for any U.S. citizen considering relinquishing their citizenship or long-term resident status. Proper planning, compliance with tax obligations, and timely filing of forms such as IRS 8854 can help mitigate potential tax liabilities and avoid unwanted designation. If in doubt, consulting with a tax professional can provide valuable guidance and help ensure a smooth transition.