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February 6, 2005

Expatriation To Avoid Taxes Under New Law

The American Jobs Creation Act Changes Rules on US Expatriation to Avoid Taxes

The American Jobs Creation Act (AJCA) of 2004 amends Section 877 of the Internal Revenue Code (IRC), which provides for an alternative tax regime for certain expatriated individuals. Amended IRC § 877 eliminates the tax avoidance criteria for imposition of the expatriation tax on certain types of income for 10 years following expatriation, and creates objective criteria to impose the tax on individuals with an average income tax liability of $124,000 for the 5 prior years or a net worth of $2,000,000 on the date of expatriation. In addition, it requires individuals to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation. Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer. Finally, even if they do not meet the monetary thresholds for imposition of the § 877 expatriation tax, the new law provides that individuals will continue to be treated as U.S. citizens or long-term residents for U.S. tax purposes until they have notified the Secretary of the Department of State (DOS) or of Homeland Security (DHS) of expatriation or termination of residency.

The implementation date of this provision is retroactive and applies to expatriations occurring after June 3, 2004. The expatriation is not effective until the notification and tax satisfaction certifications are filed with the IRS and DOS/DHS. Form 8854 is being modified for use in making the initial certification to the IRS, new information reporting required for the 10 years following expatriation, and the notification to DOS/DHS. Guidance will be issued soon on how expatriated individuals should make the required certification and notifications. Transition rules are also being developed to deal with the retroactive aspects of these provisions of the AJCA 2004.