The expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency. Long-term residents are lawful permanent residents of the United States in at least 8 of the last 15 tax years ending with the year residency ends. The rules that apply are based on the dates of expatriation, specifically expatriation before June 4, 2004; between June 3, 2004 and June 17, 2008; and after June 16, 2008.

Before June 4, 2004, the expatriation rules applied if the principle purpose of the act was the avoidance of U.S. taxes. This was determined by the tax avoidance test. Under the test a taxpayer was presumed to have tax avoidance as the principal motivation if:

  • The average annual net income tax for the last 5 tax years ending before the date of expatriation was more than $100,000, or
  • The net worth of the individual on the date of expatriation was $500,000 or more.

The expatriation tax applied to the 10-year period following the date of expatriation or termination of residency.

In 2004, revisions to the above scheme eliminated the tax avoidance test, increased the tax and net worth thresholds, and added short-term residence rules for aliens spending more than 30 days in U.S. in any of 10 years following expatriation. Under this new set of rules the expatriation tax did not apply for any year during the 10 year period for which the taxpayer was physically present in the United States for more than 30 days exclusive of time spent rendering personal services for an unrelated employer.

The tax treatment of individuals that renounced citizenship changed significantly in 2008. As part of the HEART Act, Congress replaced the existing system with the “mark-to-market” regime imposing an exit tax as well as succession taxes on gifts/bequests to U.S. persons made directly or via trusts.