Form 8854, titled "Initial and Annual Expatriation Statement," is a U.S. tax form that must be filed by individuals who are expatriating (renouncing U.S. citizenship or relinquishing U.S. permanent resident status, also known as a green card holder) and who are subject to the exit tax provisions under U.S. tax law.
This form is required by the IRS as part of the process for expatriates to fulfill their tax obligations when they give up their U.S. citizenship or permanent residency. The purpose of Form 8854 is to help determine whether the individual is subject to the exit tax and to report certain aspects of their financial and tax status to the IRS.
Key Purposes of Form 8854
- Determine Exit Tax Liability:
- U.S. citizens and long-term residents (green card holders) who expatriate may be subject to an exit tax. This tax is essentially a tax on the unrealized capital gains of the expatriating person’s worldwide assets as if they had sold everything on the day before they expatriated.
- The exit tax applies if the expatriate meets certain thresholds, including having an average annual net income tax liability over the past five years above a certain amount, or if their net worth exceeds a specified threshold.
- Compliance with Expatriation Rules:
- Form 8854 ensures that expatriates meet the requirements for tax compliance before they renounce their citizenship or green card status, and it helps the IRS determine whether they owe any taxes as a result of the expatriation process.
Who Must File Form 8854?
Form 8854 must be filed by:
- U.S. Citizens: U.S. citizens who renounce their citizenship must file Form 8854.
- Long-Term Residents: Individuals who have been U.S. permanent residents (green card holders) for at least 8 of the last 15 years and then relinquish their status must file this form.
Form 8854 must be filed in the year the individual expatriates (the year of renunciation or relinquishment) and in subsequent years if the expatriate is subject to ongoing reporting requirements.
Main Information Reported on Form 8854
Form 8854 collects important information about the individual’s financial and tax situation, including:
- Personal Details:
- Basic information such as the taxpayer’s name, address, and Social Security Number (SSN).
- Expatriation Date:
- The specific date on which the individual renounced their U.S. citizenship or relinquished their green card.
- Net Worth:
- A statement of the individual’s net worth at the time of expatriation. If the individual's net worth exceeds $2 million, they may be subject to the exit tax.
- Income Tax Liability:
- The form requires the individual to report their average annual income tax liability for the five years preceding expatriation. If the average annual net income tax liability exceeds a specific threshold (currently $171,000 for 2023), the individual is subject to the exit tax.
- Statement of Compliance:
- The individual must certify whether they have complied with U.S. tax filing requirements for the five years prior to expatriation. This includes filing tax returns and paying any owed taxes.
- Exit Tax Calculation (if applicable):
- If the individual is subject to the exit tax, the form requires details of the calculation of the tax on unrealized capital gains, including information on the individual's assets.
Expatriation and the Exit Tax
The exit tax is a tax on unrealized gains for U.S. expatriates whose net worth or average tax liability exceeds certain thresholds. The key aspects of the exit tax are:
- Net Worth Test: If the individual’s net worth exceeds $2 million, they may be subject to the exit tax.
- Tax Liability Test: If the individual’s average annual net income tax liability for the five years before expatriation exceeds a certain threshold ($171,000 for 2023), the exit tax may apply.
- Mark-to-Market Tax: For individuals subject to the exit tax, their assets are considered to have been sold on the day before expatriation, and they must pay tax on the capital gains of those assets as if they had been realized.
