International & Foreigner Tax
Do Green Card Holders Have to File Expatriation Tax Returns When Giving Up Their Green Card?
Understanding the 8-Year Rule, Form 8854, and the 40% Transfer Tax Risk
Topics in this guide:Green cardExpatriation taxForm 8854
Translated from Kit's Chinese guide. Read the original (中文)
Many immigrants choose to give up their U.S. green cards due to retirement, relocation, family considerations, or business opportunities abroad.
Unfortunately, many people become concerned after reading online articles discussing:
- Expatriation Tax
- Form 8854
- Covered Expatriate Status
- 40% Gift and Inheritance Tax
The good news is that not everyone who gives up a green card is subject to these rules.
Step 1 – Are You a Long-Term Resident?
Before expatriation tax rules apply, the IRS first determines whether you are considered a Long-Term Resident.
A Long-Term Resident is generally a green card holder who held lawful permanent resident status in at least 8 of the 15 tax years ending with the year of expatriation.
Example 1
Green Card Issued: 2017
Green Card Abandoned: 2021
Tax Years as Green Card Holder:
- 2017
- 2018
- 2019
- 2020
- 2021
Total: 5 Tax Years
Result:
Generally not a Long-Term Resident.
Example 2
Green Card Issued: 2013
Green Card Abandoned: 2024
More than 8 tax years as a green card holder.
Result:
Long-Term Resident status applies and expatriation tax rules must be analyzed.
Step 2 – What Is a Covered Expatriate?
Even if you are a Long-Term Resident, you do not automatically owe expatriation tax.
You may become a Covered Expatriate if any one of the following applies:
1. Net Worth of $2 Million or More
Worldwide assets are included, such as:
- U.S. real estate
- Foreign real estate
- Bank accounts
- Investment accounts
- Business ownership interests
- Life insurance cash value
- Notes receivable
- Retirement accounts
2. Average Income Tax Liability Exceeds IRS Threshold
The threshold is adjusted annually for inflation: your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency must be more than the specified amount ($201,000 for 2024, $206,000 for 2025 and $211,000 for 2026).
3. Failure to Certify Five Years of Tax Compliance
This includes:
- Federal income tax returns
- FBAR filings
- Form 8938 reporting
- Other required international tax filings
What Is Form 8854?
Form 8854 (Initial and Annual Expatriation Statement) is used to:
- Report worldwide assets
- Determine net worth
- Certify five years of tax compliance
- Determine Covered Expatriate status
What Happens If Form 8854 Is Not Filed?
If Form 8854 is required but not filed, the IRS may assess a $10,000 penalty, unless the failure was due to reasonable cause.
Penalty relief may be available if the taxpayer can demonstrate reasonable cause.
Understanding the 40% Transfer Tax
One of the most common concerns is:
"If I give money to my spouse or children after expatriation, will they owe a 40% tax?"
This concern relates to IRC Section 2801.
If a person is classified as a Covered Expatriate, future gifts or inheritances transferred to U.S. citizens or U.S. residents may trigger additional tax consequences.
However, these rules generally apply only to Covered Expatriates.
Most individuals who do not meet the Long-Term Resident requirements never reach this stage of analysis.
Documents to Gather Before Giving Up a Green Card
Immigration Documents
- Copy of Green Card
- Form I-407
- USCIS abandonment confirmation
Tax Documents
- Five years of tax returns
- FBAR filings
- Form 8938 filings
- Foreign asset reporting records
Asset Documentation
- Real estate appraisals
- Bank statements
- Investment account statements
- Business ownership records
- Life insurance cash value statements
- Notes receivable documentation
CPA Recommendation
Many people assume:
"Giving up a green card automatically triggers expatriation tax."
In reality, the first question is:
Are you a Long-Term Resident?
If you have not held a green card for at least 8 tax years, many expatriation tax rules may not apply.
Before giving up a green card, consult with a qualified CPA or international tax advisor to determine your filing obligations and avoid costly mistakes.
Need Help Determining:
- ✓ Long-Term Resident Status
- ✓ Form 8854 Filing Requirements
- ✓ Covered Expatriate Status
- ✓ 40% Transfer Tax Exposure
Contact our office for a professional consultation.
Kit Leung CPA Certified Public Accountant California, USA
The material on this site is general information, not tax advice, and does not create a client relationship. Your situation may differ. Speak to us before you act on anything here.
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