In this post, I am discussing the USA Tax Implications & Compliances for surrender of US Citizenship/Green Card. This will be helpful for those Indians who return from USA and want to settle down permanently in India.
Note – Content in this post contains an extract of main IRS tax guidance on this topic. For detailed & up-to-date guidance, refer IRS website for Form 8854 (PDF) & Instructions to Form 8854 (PDF)
On the question of whether to surrender US Citizenship/Green Card on return to India, you can check out my detailed post here – Should I retain my US citizenship/ Green Card on Return to India?
If you surrender your US Citizenship/Green Card status, you need to file Form 8854 with the IRS. This form basically is a certification from your end to IRS that you’ve paid off all your tax obligations in the USA. Hence, in the year of relinquishment, you are also required to file an Expatriation Statement in Form 8854.
Who does Form 8854 apply to?
As per IRS directions, Section 877A of the Internal Revenue Code applies to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated) on or after June 17, 2008.
Form 8854 is used by expatriates to certify compliance with tax obligations in the 5 years before expatriation and to comply with their initial and annual information reporting obligations under section 6039G.
Who Must File
You must file your initial Form 8854 (Parts I and II) if you relinquished your U.S. citizenship in 2023 or you are a long-term resident (LTR), defined below, and terminated your residency in 2023.
You must file your annual Form 8854 (Parts I and III) if you expatriated before 2023 and you:
1. Deferred the payment of tax,
2. Have an item of eligible deferred compensation, or
3. Are a beneficiary of a nongrantor trust.
Expatriation. Expatriation includes the acts of relinquishing U.S. citizenship and terminating long-term residency.
Refer Detailed IRS Instructions for definition of the following terms –
- Date of relinquishment of U.S. citizenship
- Long-term resident (LTR)
- Lawful permanent resident
- Date of termination of long-term residency
When To File Form 8854
As per IRS rules, you need to attach your initial Form 8854 to your income tax return (Form 1040, 1040-SR, or 1040-NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions).
You need to separately send a copy of your Form 8854, marked “Copy,” to the below address –
Internal Revenue Service
3651 S IH35
MS 4301AUSC
Austin, TX 78741
If you are not required to file an income tax return, you need to only send your Form 8854 to the address under Where To File, later, by the date your Form 1040-NR (or Form 1040 or 1040-SR) would have been due (including extensions) if you had been required to file.
Note. If you were a U.S. person for any portion of 2023, you may be required to file Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR). In addition, you may be required to file Form 8938, Statement of Specified Foreign Financial
Assets. Please check my detailed posts on these reportings to IRS –
Penalties for failing to file Form 8854
If you are subject to section 877A and required to file Form 8854 for any tax year, and you fail to file or do not include all the information required by the form, or the form includes incorrect information, you will owe a penalty of $10,000 for that year, unless it is shown that such failure is due to reasonable cause and not willful neglect.
Taxation for Covered Expatriates Under Section 877A
If you qualify as a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value (FMV) on the day before your expatriation date (“mark-to-market tax”). This applies to most types of property interests you held on the date of your expatriation. This is subject to a few exceptions not covered here for brevity’s sake.
Gains from deemed sales are taken into account without regard to other rules under the Code. Losses from deemed sales are taken into account to the extent otherwise allowed under the Code. However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn’t apply. For 2023, the net gain that you must otherwise include in your income is reduced (but not below zero) by $821,000.
References: Form 8854 (PDF) & Instructions to Form 8854 (PDF)
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