they are not required to do so.
A single (not married) US resident or citizen (including one living abroad) is not required to file an annual income tax return if they have less than USD 9,750 of gross income per year. The amount is less than USD 3,800 if they are married and filing separately.
A US citizen must relinquish (or renounce) his or her US citizenship in order to leave. If you do leave the US, you must also take into account the income and capital transfer taxes imposed by the US state and community in which you last lived or in which you own any property.
Until 1966, the US made no serious effort to keep Americans from giving up citizenship for tax reasons. The first US anti-expatriation rules enacted in 1966 were generally unenforceable, but they have been beefed up several times during the next four decades. Since 1995, most anti-expatriation rules have also applied to long-term resident aliens, those who have held green cards in eight of the last 15 years. The rules have never been applied to those who do not hold green cards, even those who have been fully subject to US income taxes for many years because they were deemed to be US residents under the substantial presence test (because they spent an average of more than four months a year in the US).
After more than a decade of unsuccessful attempts, Congress finally passed an exit tax in 2008. Anyone who gave up US citizenship or long-term residence before 17 June 2008 is covered by old rules. Most of these old rules have been replaced for persons covered by the new rules. Those who have expatriated after that date are covered by the new rules. They do not generally face continued US taxation or tax returns for ten years after expatriation. The new rules apply to US citizens who give up US citizenship and to departing aliens who have held a green card for eight of the last 15 years. Anyone who leaves after holding a green card even one day more than seven years risks becoming a covered expatriate subject to the exit tax and a new punitive death and gift tax regime.
The new US exit tax law is quite complex, and it contains numerous cross-references to other sections of the US tax law. This explanation is necessarily over-simplified. Anyone seriously interested in exploring possibly giving up US citizenship or a green card should obtain competent professional advice.
The new exit tax does not apply to everyone who expatriates. It applies to you if you meet either of two monetary tests, one of which can change each year because it is indexed for inflation. You must also certify to the IRS under penalties of perjury (on IRS Form 8854) that you have complied with all of your US tax obligations for the last five years. If you meet either an income tax test or a net worth test, or if you do not make the required certification, you are a covered expatriate and you are subject to all of the negative aspects of the new exit tax law.
If you expatriate during 2014, the income tax test will be based on the average of your US federal income tax liability after foreign tax credits for the five years 2009-2013. If your average net income tax liability during these years was more than USD 157,000 a year, you are a covered expatriate. This amount is indexed for inflation annually and will probably be increased in future years.
The other test is based on your net worth on the day immediately before your expatriation date. If your net worth is at least USD 2 million on that date you are a covered expatriate. That amount is not indexed for inflation.
If you don’t meet either monetary test and you make the required certification, you are not a covered expatriate and you are not subject to the exit tax. If you are a covered expatriate, the next step is to calculate the amount of your exit tax.
Certain assets are excluded when you determine your net gain subject to the exit tax. These include your interests in non-grantor trusts and in eligible deferred compensation items such as qualified pension plans, profit sharing plans or qualified annuity plans. An alternative tax system applies to these properties. You will be required to send the payers of these items IRS Form W-8CE (Notice of Expatriation and Waiver of Treaty Benefits). The trustees or other payers must withhold 30% US income tax on any amounts they subsequently pay you that would have been taxable had you remained a US citizen or resident. You cannot reduce this tax under any tax treaty.
US real estate is covered by the exit tax. After you expatriate, each US real property interest will be covered by FIRPTA (the Foreign Investment in Real Property Tax Act), but its basis will be adjusted by the amount of gain to which the asset has been subjected to the exit tax.
If you have an IRA (individual retirement account) or some other specified tax-deferred account, you will be treated as receiving your entire interest in that account on the day preceding your expatriation date. You must pay tax thereon, but you will not be subject to a penalty for early withdrawal.
With respect to all of your other worldwide assets, you must determine the fair market value and the adjusted cost basis of each asset. Each of these assets must be marked-to-market as though you had sold it the day before your expatriation date.
Gains and allowable losses are taken into account. Tax is imposed on your net gain exceeding a set amount. The federal tax rate on long-term capital gains (those on most assets held more than a year) may now be as high as 23.8%. Most state and local governments impose additional taxes. One observation: many US taxpayers who sustained large capital losses during 2008 still have large capital loss carryovers and these can be taken into account in calculating their exit tax.
You can elect to defer paying the exit tax on some or all of your assets by making an irrevocable asset-by-asset election to do so until you die or dispose of the asset. You must provide adequate security to the IRS and maintain such security in force.
In a typical case, a US citizen’s expatriation date is the date on which they sign a statement voluntarily relinquishing US nationality or an oath of renunciation before a US consular officer somewhere outside the US even though expatriation is not confirmed until some months later when they receive a CLN (Certificate of Loss of Nationality).
A typical long-term resident’s expatriation date is the date on which they file a Department of Homeland Security Form I-407 with a US consular officer. You can’t just cut up your green card.
If you pay any required exit tax (or you are not a covered expatriate) and you live overseas, you will be taxed as a non-resident alien individual provided you do not become a US resident under the substantial presence test by spending too many days in the US. That test generally permits you to spend an average of up to about 120 days a year in the US without being treated as a resident for US tax purposes. Since that test is based on a moving average of days (including partial days) you have spent in the US over a three-year period, you should obtain professional advice on how that test will apply to you.
You will also have to escape the other tentacles of the “tax octopus” and comply with all US immigration law requirements if you wish to visit the US. You must obtain a visa to enter the US unless your passport is issued by a country that is covered by the US visa waiver program.
If you are a covered expatriate, the nastiest part of the new law imposes a special new income tax or transfer tax on all covered gifts or bequests exceeding USD 14,000 per year that any US citizen, resident or trust receives from you either directly or indirectly at any time after you expatriate. The tax rate will be the highest rate of gift or estate tax imposed at the time of the gift or your death. For those dying after 2012, that rate is 40%. Exemptions apply for gifts or bequests received by your spouse (if they are a US citizen) or a qualifying charity. We are still awaiting regulations or other guidance from the IRS as to how this new tax on gifts or inheritances will work. The IRS has deferred the reporting and tax obligations with respect to this tax pending the issuance of guidance. The IRS has also stated that it will provide a reasonable period of time between the issuance of such guidance and the date it prescribes for filing the required reports and paying the tax.
The new law does
