The U.S. is the only country in the world which levies taxes on the basis of citizenship rather than residency—meaning people can be liable to the IRS without ever having lived in the country, if they hold a U.S. passport or green card. AU.S. citizen or a long-term resident can permanently disconnect from future tax obligations by relinquishing their U.S. citizenship or abandoning their green cards. One concern of expatriates is what happens to their retirement plans and IRAs when they give up their U.S. citizenship or green card. The tax consequences of expatriation are dependent upon whether you’re considered what the Tax Code considers a “covered expatriate:” you are a “covered expatriate” if any of the following statements apply.
- Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014).
- You fail to certify on Form 8854 that you have complied with allU.S.federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
Here is a summary of the tax rules for qualified retirement plans and IRA:
| covered expatriate | not covered expatriate | |
| “qualified” retirement plans (401k, SIMPLE IRA and SEP) | How your retirement plans is taxed will depend on whether it is an eligible deferred compensation item or not.
In order to keep your qualified retirement plans to be an eligible deferred compensation item, you must give your 401(k) plan administrator Form W-8CE within 30 days of your expatriation date. In this case, you will payU.S.income tax on the distributions you receive only when you receive the distributions, and the tax rate will be 30%. You will not be permitted to reduce yourU.S.income tax rate by invoking protections from an income tax treaty. If you do not give your 401(k) plan administration a Form W-8CE within 30 days of your expatriation date, your retirement plans will become an ineligible deferred compensation item .You will be treated as receiving a lump sum distribution from the entire plan balance on the day before your expatriation date, and you will pay U.S. income tax on that amount at the tax rate that applies to you in the year of expatriation. The early distribution penalty doesn’t apply on the deemed distribution. |
If you’re not a covered expatriate, you’re only subject to a single 30% withholding tax when distributions are made and you may be able to use a tax treaty to reduce this tax.
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| traditional IRA | If you’re a covered expatriate, your traditional IRA terminates when you expatriate and you must pay tax on the entire untaxed portion of the plan. The early distribution penalty doesn’t apply even if you are under 59-1/2. | If you’re not a covered expatriate, the plan doesn’t automatically terminate. A withholding tax of up to 30% applies upon distributions. This tax rate may be reduced under a tax treaty.
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| Roth IRA | A covered expatriate is treated as receiving a distribution of his entire interest in such account on the day before the expatriation date. If the Roth IRA’s distribution triggered by expatriation is a “qualified distribution”, there will be noU.S.income tax payable because of the expatriation. If the distribution caused by expatriation is not a qualified distribution, any distributions above your Roth IRA contributions will be taxable income. No penalty applies on an early distribution. | If you’re not a covered expatriate, expatriation does not trigger an automatic distribution. General tax rules apply upon distribution. |
