Are you considered a Covered or Uncovered Expatriate
Written by Carson Hamill CIM®, CRPC®, Associate Portfolio Manager and Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Portfolio Manager
For individuals considering expatriation, understanding the tax implications is crucial. One major consideration to be aware of is the U.S. exit tax. You may be charged an exit tax on your income in your last year of citizenship or residency. In this blog we provide an overview of the U.S. exit tax and what it means to be a covered versus an uncovered expatriate.
- Covered vs Uncovered
- Determining if You are a Covered Expatriate
- Obligations of Covered Expatriates
- Green Card Holders
- Exceptions To Covered Expatriate Status
Covered vs. Uncovered
When it comes to U.S. exit tax, there are two categories of expatriates, those that are considered covered expatriates, and those that are categorized as uncovered (or non-covered) expatriates.
Covered Expatriate
If you are considered a covered expatriate, you are deemed to have sold all of your worldwide assets on the day before expatriation and pay taxes on the resulting gains.
Uncovered Expatriate
Uncovered expatriates (also known as non-covered expatriates) on the other hand, do not have to go through a claim-of-sale process. Instead, they are expected to inform the IRS about their expatriation using Form 8854 and that is generally the extent of their obligations as it pertains to U.S. exit tax.
Determining if You Are a Covered Expatriate
To determine whether you fall under the covered expatriate category, you must meet one of the following standards:
- Certification Test
- Net Worth Test
- Tax Liability
Certification Test
You fail to indicate on Form 8854 that you have filed a tax return for each of the past five years.
Net Worth Test
If you have a personal net worth of over $2 million on the date of expatriation. This is per person, so both you and your spouse could each be worth $1.9 million and still avoid the exit tax.
Average Annual Income Tax Liability Test
The expatriate’s average annual net income tax for past five tax years is over a set amount. For 2021, the hurdle is $172,000 (up from $171,000 in 2020 and $168,000 for 2019).
Obligations of Covered Expatriates
When an individual is a covered expatriate, they may have to pay an exit tax, in addition to an ongoing annual filing requirement of Form 8854 (even after they surrendered their status).
Green Card Holders
It’s a little different for green card holders — if you’re considered a long-term resident (or green card holder for eight of the past 15 years) you could be subject to the exit tax. But, if you are a green card holder and have only had it for two years, you may not be considered a long-term resident and then, wouldn’t have to worry about the exit tax.
Exceptions To Covered Expatriate Status
While failing the certification test automatically categorizes you as a covered expatriate, there are exceptions available for individuals who meet the certification test but fail one or both of the other tests. If you fall into this category, you may still qualify as a non-covered expatriate by utilizing one of these exceptions, even if your net worth or net tax liability exceeds the IRS thresholds.
It is best to consult with a cross border tax consultant or visit the IRS Expatriation Tax website for more information.
Summary
There are many implications and considerations faced by individuals looking to renounce their U.S. citizenship. In this blog, we shed light on the potential tax issues associated with the US exit tax. Before considering expatriation, it is essential to consult with an experienced tax professional, as they can provide valuable guidance in navigating the complexities.
Next Steps
If you’re planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email Snowbirds Wealth Management, as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors and assistant branch manager with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.To schedule an introductory call, please click here.
Statistics and factual data and other information are from sources RJLU believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJLU is to be under no liability whatsoever in respect thereof.
Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Investors outside the United States are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this site. Raymond James (USA) Ltd. is a member of FINRA/SIPC.
