Expatriation Tax

What Is an Expatriation Tax?

An expatriation tax is a government fee charged to individuals who renounce their citizenship, usually based on the value of a taxpayer's property. In the United States, the expatriation tax provisions under Section 877 and Section 877A of the Internal Revenue Code (IRC) apply to U.S. citizens who give up their citizenship, and long-term residents who end their U.S. resident status for federal tax purposes. Different rules apply, according to the date upon which a person expatriated.

Understanding the Expatriation Tax

Expatriation tax rules in the U.S. apply to people who settled abroad permanently on or after June 17, 2008. These rules apply to anyone who expatriates with a net worth of over $2 million, fails to certify that they’ve complied with U.S. tax law for the five years preceding their expatriation, or who has an annual net income tax for the five preceding years over a certain amount. This amount changes each year based on inflation, but in 2020 it was $171,000.

Expatriation taxes are not common throughout the world. Only the U.S. and Eritrea charge income tax on citizens who take up residence abroad. Some other countries, such as Canada, have a departure tax for those emigrating to other countries, though this differs from an expatriation tax.

The expatriation tax in the U.S. is based on the value of an individual taxpayer’s property on the day before their expatriation. The IRS takes into account fair-market value of taxpayers' property as though taxpayers liquidated their assets, selling all of their property on this day. The difference between the fair market value and what a particular taxpayer paid for a property is a net gain under the tax. Likewise, any losses also are taken into account through the same method. Any gain over $737,000 (2020 limit), a number adjusted regularly for inflation, is subject to tax.

Because many people who expatriate do so to avoid tax laws regarding their assets, the IRS imposes more severe tax implications for expatriates. The expatriation tax does not apply to individuals who prove to the Secretary of the Treasury that their reason for expatriation is not to evade taxes, such as a person with dual citizenship choosing to make another country a permanent residence.

The IRS imposes still penalties anyone who failed to file an expatriation form as required. Covered expatriates must file form 8854. The IRS informs people who do not file this form as required they are in violation and subject to a potential $10,000 penalty.