Expatriation in 2025: Navigating an Evolving Landscape with Enduring Code Sections

Overview

• U.S. federal tax expatriation provisions, primarily Internal Revenue Code Sections 877A and 2801, apply to individuals who relinquish U.S. citizenship or long-term permanent residence (green cards).
• These sections have remained largely unchanged since 2008, but various factors have influenced their application and motivations for expatriating.

Background

• Expatriation tax consequences apply to those terminating U.S. citizenship or lawful permanent residence.
• Planning opportunities exist to mitigate expatriation tax exposure.

Key Changes and Considerations

Section 2801 Transfer Tax Regulations

• Imposes tax on gifts/bequests from covered expatriates to U.S. citizens/residents.
• Final regulations issued in January 2025; prior transfers forgiven.
• Form 708 to be used for tax reporting (not yet released).

Notice 2009-85

• Provided guidance for Sec. 877A but ruled not binding in recent court case (Aroeste v. United States).
• Ruling offers more flexibility but also uncertainty.

Green Card Holders and Treaties

• Green card holders can avoid expatriation tax by claiming foreign residence under a tax treaty.
• Court ruling in Aroeste indicated paperwork errors don't prevent claiming foreign residence.

Motivations for Expatriation

• Driven by desire to limit tax liabilities and foreign filing requirements.
• Double taxation concerns due to lack of foreign tax credit against NIIT.
• Possible changes to residence-based taxation by administration.
• Requirement for dual citizenship as a practical barrier to expatriation.

Constitutionality Concerns

• Growing doubts about the constitutionality of Sec. 877A, questioning its adherence to the Sixteenth Amendment.
• Potential for protective claims for refunds where tax was previously paid.

Expanding Exceptions to Covered Expatriate Status

• Limited exceptions for dual citizens or those expatriating under 18 years of age.
• Taxpayer Assistance and Service Act seeks to simplify procedures for lower-income expatriates.

Conclusion

• While code sections 877A and 2801 remain unchanged, new regulations and external factors are causing taxpayers to reconsider expatriation.
• Important to consult with knowledgeable advisors to navigate this complex legal landscape.