How to Complete IRS Form 8854 After Renouncing U.S. Citizenship

The choice of giving up citizenship from the U.S or ending the status of having a green card for a prolonged period is a decision that is life changing. There is, however, no awareness of the fact that one’s tax obligations within the time period of a year, can end. Based on the IRS system, one is supposed to submit Form 8854 in order to terminate all ties with the tax system of the U.S. This form is of two main purposes:

• Proof you have filled all tax obligations within the last 5 years from the date you have filled the form.
• Establishing if you have any exit tax.

Not filling in Form 8854 or filling with the wrong information can have serious consequences such as a $10,000 dollar fine as well as the IRS still classifying you as a tax paying citizen from the U.S. This article contains detailed information on the forms that one is still obliged to submit, the processes that come with filling the IRS Form 8854, as well as ways to eliminate common and expensive errors.

Who Needs to File Form 8854?

Based on the status one holds, Form 8854 renunciation has to be filled where one:

• Renounce your U.S. citizenship with the State Department.
• Terminated long-term U.S. residency, meaning you were a green card holder in at least 8 of the last 15 years.

This specific filing requirement applies for the particular tax year in which your expatriation tax occurs. For instance, If you would renounce your citizenship in 2024, you will file Form 8854 along with 2024 tax returns which will be due in 2025.

Covered Expatriates vs. Non-Covered Expatriates The IRS classifies expatriates into two groups.

Covered expatriates are those who meet any of these tests:

• Net worth of $2 million or more on the expatriation date.
• Average annual income tax liability of at least $201,000 (2024 threshold) for the previous 5 years.
• Failure of tax compliance certification for the 5 years leading to expatriation.

Non-covered expatriates are those who do not meet any of the above criteria. But, as a covered expatriate you may be subject to the exit tax.

Understanding the Exit Tax

The exit tax is a tax on your unrealized gains at the time of expatriation. Here’s how it works:

• Net worth test: If, on the date you expatriate, your worldwide net worth is equal to or exceeds $2 million, you meet one of the criteria for being a covered expatriate.
• Tax liability test: If, for the past five years, you maintained an annual average income tax liability to the U.S. above $201,000 (indexed for warranty inflation), you would also be considered a covered expatriate.
• Mark to market rule: The IRS, for most purposes, considers you to have sold most of your worldwide properties on the day before you became a former U.S. citizen. You have to compute the gain and pay tax on it, of which you are entitled to an exclusion amount (for 2024, $821,000).
• Special considerations: Non-qualified deferred compensation, various retirement plans, and even some interests in trusts have their own rules. These types of accounts will likely be the subject of ongoing reporting and/or tax withholding.

Understanding these rules is crucial because poor decisions may lead to unwarranted taxes or hefty penalties.

Step-by-Step Guide to Completing Form 8854

Completing Form 8854 is an arduous task. It is especially difficult for people whose financial portfolios are intricate in structure. Below are some essential points to consider for each section:

Part I: General Information

Fill in the section with your last name, first name, and any aliases and append with the location or country of duplication. Provide also your place of birth and the exact date of birth as well as the CF-EBK date if one was allocated to you. You must also append a photo which must comply with the stated visa regulations and issue.

Part II: Net worth and Assets

This is the most highly granular section of the form. You are required to:

• Declare each of your assets and liabilities together with any real estate properties or investment portfolios, retirement savings accounts, and business enterprises.
• Take the FMV of the assets.
• Subtract the liabilities to calculate net worth.

For assets that may be hard to value such as privately-held businesses, real estate, or collections of artwork, professionally done appraisals should be sought. Incorrect valuations may incur the scrutiny of the IRS.

Part III: Certification of Income Tax Liability

You must certify that you fully complied with all tax obligations of the U.S. for the five-year period before the date of expatriation. If you cannot certify compliance, you automatically become a covered expatriate, regardless of the net worth or income tax tests.

Make sure to revisit years of tax compliance to have the necessary documentation to sign this particular certification. 

Timing and Filing Requirements

Form 8854 is due on April 15 of the year after expatriation (or the extended due date if you file for an extension).

Form 8854 is to be attached to your last U.S. tax return (Form 1040 or 1040-NR), the IRS instructions state to mail a copy to the address listed for the IRS separately.

You may incur penalties of up to $10,000 and ongoing U.S. tax obligations for failure to file or filing an incomplete form.

How Dimov Tax Can Help

Unwinding an expatriation tax and dealing with Form 8854 is tricky. Dimov Tax provides support on:

• Status evaluation: Check if you are a covered expatriate.
• Form filing: Prepare Form 8854 and submit it before the deadline.
• Exit tax assessment: Check if the mark-to-market rule and other provisions are correctly applied.
• Global tax strategy: Planning to manage assets after expatriation to limit U.S. tax obligations in the future.

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