Many lay p
ersons are stumped as they try to understand the tax consequences of Sections 877 and 877A. The language in the drafting of the statutes is not so clear. Be careful to understate the meaning and how the IRS interprets the law.
One of the greatest risks for anyone who wants to self-diagnose their path towards becoming a former U.S. citizen, is Section 877(a)(2)(C). To be blunt, anyone who renounces their citizenship at the Embassy or Consulate will find that process relatively easy. However, no one at the U.S. Department of State will provide tax advice or try to interpret the meaning of Section 877(a)(2)(C). Indeed, the Foreign Affairs Manual used to read to the person taking the oath, simply provides the standard overview language of “special tax consequences” arising form the renunciation.
Even the most economically modest individual, with little assets or income, can fall into this trap for the unwary – Section 877(a)(2)(C). The statute is spelled out below –
- This section shall apply to any individual if—
- (A) the average annual net income tax . . . is greater than $124,000,
- (B) the net worth of the individual as of such date is $2,000,000 or more, or
- (C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
The provision is clear that anyone who does not satisfy it, will be a “covered expatriate” and hence subject to the taxation and reporting requirements under Sections 877 and 877A and 2801.
This is worth understanding well, before rushing off to take the oath at the U.S. Embassy or the U.S. Consulate.
One of the greatest traps for the unwary is how Section 877(a)(2)(C) can cause even the most economically modest person to become a “covered expatriate” with the adverse tax and reporting requirements that follow.
All individuals should have a clear understanding about how this specific code section can affect their personal taxes and the future taxes of any future gifts or bequests/inheritances to U.S. beneficiaries. All U.S. citizen or U.S. resident children, grandchildren and friends and family of the “expatriate” who fall into this “Section 877(a)(2)(C) trap” will likely be subject to the 40% tax on “covered gifts” or “covered bequests.” This can come as a real surprise years after the “renouncing” citizenship or “abandoning” lawful permanent residence status.
This Blog is intended to provide general information about tax expatriation legal concepts under U.S. law to help readers better understand often very complex issues within the U.S. international tax field for citizens and lawful permanent residents. General legal information is not the same as legal advice, that is, the concrete application of law to a specific case with unique and particular facts.
Although the author has taken great care to make sure that the information contained herein is accurate and useful, it is necessary that you consult an experienced attorney to address any particular situation. Most importantly, if you are contemplating renouncing U.S. citizenship or formally abandoning your LPR status, you must get legal advice. This is a very important decision with a range of complex legal consequences.
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ersons are stumped as they try to understand the tax consequences of Sections 877 and 877A. The language in the drafting of the statutes is not so clear. Be careful to understate the meaning and how the IRS interprets the law.