For Australia Citizens or US Residents Seeking to Expatriate (6 Facts)

For Australia Citizens/US Residents Seeking to Expatriate

For Australia Citizens/US Residents Seeking to Expatriate 

With the globalization of the US economy, it has become very common for US Taxpayers who are citizens of foreign countries such as Australia to either become a citizen of the United States as well — or acquire U.S. tax status as a Permanent Resident status. And, when a person is considered a US Citizen or Long Term Lawful Permanent Resident and decides to formally exit the United States, they are required to file certain IRS tax forms and perform various calculations to determine whether or not they will become subject to an exit tax. Initially, the taxpayer must determine whether they are a  covered expatriate. And, even if they are a covered expatriate, they still have to determine whether or not they are subject to the exit tax (read: not all covered expatriates are required to pay a U.S. exit tax). Let’s look at six important facts about expatriating for Australian citizens who are considered U.S. Citizens or Long-Term Lawful Permanent Residents (LTR).

Dual US Citizenship or Permanent Resident?

When a Taxpayer is considered to be an Australian Citizen but also has US Citizenship or Lawful Permanent Resident status as an LTR, they must determine whether they are a covered expatriate at the time they want to formally exit the United States. For taxpayers who are LTRs. the formal expatriation act (from an immigration standpoint) is relatively simple and the taxpayer files does little more than file USCIS Form I-407. But, when the Taxpayer is considered a US citizen, then they have to go through a much more detailed process of following the necessary Department of State forms and scheduling an interview at a consulate overseas.

3 Types of Covered Expatriates

While the ‘$2 million net worth test’ is the most commonly known test to determine if a person is a covered expatriate, there are two other tests as well. There is the net income average tax liability test (which looks at the average net income tax liability over the past five previous years), as well as the certification of five years of tax compliance. For the latter category, the taxpayer must be able to certify under penalty of perjury that they have been tax compliant for the past five years or otherwise they are considered to be a covered expatriate.

*Taxpayer has to only meet one of the three tests to be considered a covered expatriate.

Exit Tax Beyond Mark-to-Market Income

While the mark-to-market computation is the most known calculation that may be to exit tax for covered expatriates, it is important to note that there are other categories as well. For example, specified tax-deferred accounts and ineligible deferred compensation (which typically can include superannuation) require their own separate exit tax computation and may lead to exit tax – even if there are not mark-to-market gains above the exclusion amount.

Super May be Taxable at Exit

Superannuation may be taxable at exit as ‘ineligible’ deferred compensation. And, depending on whether the foreign person had an Australia superannuation before they became a US person will impact whether or not they can apply step-up value to the basis of the superannuation or other pension/assets to determine whether or not they can reduce any potential exit tax implications.

Foreign Mutual Funds

The rules involving mutual funds can be complicated based on proposed regulations and something that the taxpayer should discuss with a Board-Certified Tax Law Specialist in anticipation of expatriation – even if they are not covered.

8854/Dual Status Return/Sailing Permit

Depending on the status of the taxpayer, there may be several forms that have to file at the time that they expatriate. This may include a sailing permit along with IRS Form 8854 and the dual status final tax return. And, if they continue to have certain US-based assets after expatriation, they may also have a continuing Form 8854 and Form 1040-NR filing requirement post-expatriation as well.

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