IRS Issues Special Guidance For US Expats

by Mike Godfrey, Tax-News.com, Washington

24 April 2009

The US Internal Revenue Service has issued new guidance to certain individuals who have expatriated by relinquishing their American citizenship, or by ceasing to be treated as long-term residents of the United States.

According to the IRS's announcement:

"An individual who expatriated before June 17, 2008, and needs to file an initial Form 8854, Initial and Annual Expatriation Information Statement, may either wait until the new Form is ready or use the 2007 Form 8854. If the 2007 Form 8854 is used, the individual should strike out '2007' and replace it with '2008.' There is no due date and therefore no potential penalties. However, the individual will continue to be subject to tax as a US citizen or resident until the Form 8854 is filed."

"An individual who expatriated before June 17, 2008, and needs to file an annual Form 8854 will generally not be required to file the form until June 15, 2009, because he or she is overseas. The revised Form 8854 should be available before June 15. An individual who falls into this category and has an April 15 due date should use the 2007 Form 8854 and strike out '2007' and replace it with '2008.' If unable to file by April 15, the IRS will waive the USD10,000 penalty for late filing under the reasonable cause exception."

"An individual who expatriated after June 16, 2008, and before January 1, 2009, is required to file Form 8854 for 2008. The Form 8854 must be filed by the due date for the 2008 Form 1040 or 1040NR, with extensions. In many cases, someone in this category will have until June 15, 2009, if living and working outside the United States on April 15. However, if the return is due on April 15 and an individual has not requested an extension, he or she should do so immediately. Individuals who file Form 8854 by the due date, with extensions, will not be subject to the USD10,000 penalty for late filing."

In recent years, Congress has tightened tax laws for US citizens living and working abroad, or who have chosen to give up their US citizenship.

The Tax Increase Prevention and Reconciliation Act, signed by then President George W. Bush in May 2006, increased the amount that can be earned free from US taxes to USD82,400 from the previous level of USD80,000. However, income earned by expats above this threshold is now typically subject to higher tax rates. Furthermore, high housing costs, much of which previously could be excluded from the computation of US tax, are now treated as a taxable benefit and taxed often at 30% to 35%, making many individuals worse off, or leaving the employer to pick up the extra bill. The legislation is retroactive to January 1, 2006.

Then, last year's Heroes Earnings Assistance and Relief Tax Act tightened expatriation rules to prevent high-net-worth individuals from renouncing their citizenship or terminating their residence in America in order to avoid US taxes. Under this legislation individuals are treated as if they sold all of their property for its fair market value on the day before they expatriate or terminate their residence.

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