Can Dual Citizens Escape the U.S. Exit Tax?

How to Qualify for the Dual-Citizen Expatriation Exception

Can Dual Citizens Escape the U.S. Exit Tax?

When a U.S. citizen is ready to expatriate from the United States and is deemed a covered expatriate, they may become subject to U.S. exit tax. There are three covered expatriate tests to determine whether a taxpayer is covered. Then, even if the taxpayer is covered, it does not mean that they will have any exit taxes to pay. The taxpayer must evaluate their asset portfolio (mark-to-market gain, specified tax deferred accounts, and ineligible deferred compensation) along with their net income average tax liability over the past five years and their past five 5-years of tax compliance to determine whether they may become subject to the exit taxes. But, even if a U.S. citizen is considered a covered expatriate — and would otherwise be subject to an exit tax — they may qualify for the “dual citizen’ exception. Let’s take a brief look at how the dual citizen exception works.

*Golding & Golding previously authored this article back in November 2020, and it has been updated and expanded.

Form 8854

IRS Form 8854 is required to be filed by expatriates who are either U.S. citizens or long-term lawful permanent residents (LTRs). The instructions to Form 8854 provide a good explanation of how the ‘dual citizen’ exception works:

• • • “Exception for dual-citizens and certain minors.

      • Dual-citizens and certain minors (defined next) won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) under Covered expatriate, earlier, applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) under Covered expatriate, earlier. “

Dual-Citizen Exception

• • • “Certain dual-citizens. You can qualify for the exception described above if you meet both of the following requirements.

      • You became at birth a U.S. citizen and a citizen of another country and, as of your expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.

      • You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which you expatriated.

        • For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.”

“You Became at Birth a U.S. Citizen and a Citizen of Another Country”

The first requirement for a dual citizen to qualify for the dual citizen exception is that the taxpayer became a U.S. citizen and a citizen of another country at birth. While there are different ways to approach the context of how this statement is written, the IRS takes the position that the taxpayer had to have been born a U.S. citizen.

“You continue to be a citizen of, and are taxed as a resident of, that other Country”

 In addition, the taxpayer must continue to be a citizen of the foreign country — not just the United States — and must be taxed  by that country, as a resident of that other country. This is the very specific requirement, because most countries require the taxpayer to be a resident of that country to be taxed as a resident of that country (whereas the United states taxes individuals based on their U.S. person status so that a U.S. citizen who resides in a different country is still taxed in the United States similar to if they were a resident of the United states). This can be a difficult hurdle to get over because many taxpayers do not live in the same country of which they are a citizen of and therefore would not be taxed as a resident of that country.

“You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which you expatriates.”

In addition, the taxpayer who is a dual citizen cannot have been a resident of the United States for more than 10 years during the past 15 years that ends with the tax year in which the taxpayer expatriated. In other words, if in the 12 years before expatriation, the individual resided in the United States, then they would not qualify for this exception.

Chapter 1, Pub 519

Publication 519 is used to determine residency, and for purposes of this exercise, the taxpayer utilizes a substantial presence test as described in Chapter 1. The substantial presence test is typically used for non-citizen, non-permanent residents, but for purposes of the exception, the taxpayers should evaluate the number of days they are in the United States in conjunction with the substantial presence test.

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