Ep 22: What Is English For "Covered Expatriate"?
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If you are a U.S. citizen or a long-time resident (8 of the last 15 years), and you decide to leave the U.S. permanently, you could become a covered expatriate. You don't want to be a covered expatriate since there is a possibility you may have to pay an exit tax.
In this shortie, we tell you who a covered expatriate is. Three main tests determine whether you are a covered expatriate and the potential implications.
The income test, the net worth test, and the certification test.
Being a covered expatriate can have financial implications, such as potential liability for an exit tax and complications with gifts and estate planning.
The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.
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Jane Mepham, CFP (00:03.107)
episodes, we talk about expatriates, often shortened to expat. And an expat is an individual who basically resides in another country and it could be temporarily or permanently. And the whole idea is that this is not their country of citizenship. troops, so somebody who's moved abroad. And it could be that they moved abroad for work, you know, career advancement.
family reasons, exploration. So there's all kinds of reasons why people become expats. Now the experience of being an expat really is dependent on your individual journey. Now in today's shorty episode, we're going to talk about a very special kind of expat. So when it comes to the US tax law, one of the things we read about or we see a lot about is people who are
US citizens or green card holders or long -term permanent residents wanting to give up their US citizenship to leave the US and go somewhere else. So these people are considered to be expatriates or expats in the US tax law. And so in today's shorty episode, we want to talk about who is a covered expatriate and who's not a covered expatriate as it applies to
people wanting to leave the US permanently.
Manasa Nadig, EA (01:29.624)
Yeah, and it's easier to discuss who is not a covered expatriate. So let's look at these three main rules to decide if someone is a covered expatriate. And remember, you would be one if any one of these statements would apply to you. So basically, there are three tests, the net income tax test, the net worth test, and the certification test.
So going into these really quick, the net income tax test is if for the five years before you give up your citizenship or green card, your average yearly net income tax is more than a certain amount, which is on the IRS's website for every year, and it changes, you might be a covered expatriate. Then there is the net worth test.
So the net worth test is if on the day before you expatriate, your net worth is $2 million or more, you could be considered a covered expatriate. And remember, this net worth includes worldwide assets. And the third test is the certification test. So you need to file a form 8854 and state that
you have complied with taxes in the last five years before the date of your expatriation. That means all of your US federal tax obligations and reporting obligations. Otherwise, you will be treated as a covered expatriate. So why is it important to know that this is not an advantage to be a covered expatriate?
Jane Mepham, CFP (03:26.211)
Gotcha. So if I'm leaving the U S I want to not be a covered expatriate is what you said. And based on what you said, I think it's a reason why we always talk about be tax compliant, be tax compliant. But anyway, back to the issue. If you turn out to be a covered expatriate and you're leaving the U S you could be liable to pay an exit tax.
Manasa Nadig, EA (03:33.016)
Yes.
Jane Mepham, CFP (03:51.619)
What do I mean by an exit tax? So imagine IRS looks at all your assets and as Manasa you just pointed out, it's your worldwide assets, which includes US retirement accounts, adds up everything. And if it's over a certain amount, they make you pay an exit tax. It's almost like you sold everything on that day, which is kind of scary when you think about it.
The other issue that we see if you become a covered expatriate is when it applies to gifts and your estate planning. I've seen cases where somebody who's a covered expatriate, they left the US, ends up gifting assets or money to somebody in the US and because they were a covered expatriate and they may or may not have paid the exit tax, they're forced to pay gift taxes on this.
which really can mess up your whole net worth.
Manasa Nadig, EA (04:50.584)
I know, I know. And the thing is, you know, in all of this, all of these rules and regulations, I know that it sounds like a lot, but to most people who might be thinking about relinquishing their US citizenship or their green card, there are a few things to remember. One is if you are a green card holder and you've lived abroad,
merely abandoning your green card or letting your green card lapse is not expatriating in the right sense of the word. You must have filed the right forms in order to do this. And, you know, we don't have a lot of time to go into these steps and we will address this in another episode. But remember that. And also,
Most of these, the asset, the net worth tests and the amount of assets may not apply to you, but you still need to certify that you have complied with the US federal tax obligations. So these are steps that you must take, like Jane said, not to be a covered expatriate since that is not of any advantage for you because if you continue to be one, you are still subject
to US tax obligations. So that kind of concludes our shorty episode today. We came in right under 10 minutes. And we encourage you, dear listener, to keep on listening to us. Go to our YouTube. We have our shorties on video now. And do subscribe for more on our website, theimcafe .com. Thanks for listening. Bye.
