Matters of the HEART (Act) – Part Two

This is the second in a series of blogs discussing the rules for expatriates under the 2008 Heroes Earnings Assistance and Relief Tax (HEART) Act. There are numerous traps under the HEART Act for any U.S. citizen who relinquishes his or her citizenship or any long-term resident of the United States who ceases to be a lawful permanent resident of the United States.


Once you determine you are an expatriate, (as was explained in Part One) the next “qualification” is to determine if you are a “covered expatriate”.  Why is it of concern if you’re a covered expatriate?  Because covered expatriates are subject to various taxes under the HEART Act.  These taxes will be covered (pun intented) in subsequent blogs.


Under the IRS rules (IRC Section 877A(g)(1)(A)) there are three possible ways an expatriate can be a covered expatriate.  These are the tax liability test, the net worth test or the certification test.  Meet any one of these three tests and you are a covered expatriate. This determination to see if you are a covered expatriate is made as of the date you are no longer a citizen or a lawful permanent resident (known as the “expatriation date”).


Tax Liability Test. Under the tax liability test you are a covered expatriate if you had an average annual net income tax liability for the five preceding taxable years that exceeds a specified amount that is adjusted for inflation (it’s $155,000 for 2013).


Net Worth Test. You are a covered expatriate under the net worth test if, on the date of expatriation, you have a net worth of $2 million or more.


However, you still might not be a covered expatriate if you meet either the Tax Liability or Net Worth test if you have citizenship circumstances that involve dual citizenship at birth or relinquishing U.S. citizenship before the age of 181/2.


Certification Test. Finally, under the certification test you can fail to be a covered expatriate under the Tax Liability or Net Worth tests, yet still be considered to be a covered expatriate if you fail to certify, under penalties of perjury, that you complied with all U.S. Federal tax obligations for the five previous taxable years. This certification must be made on Form 8854 with your Federal return for the year that includes the expatriation date.


The HEART Act contains numerous tax traps for the unwary expatriate. If you plan to relinquish your US Citizenship, or have been a long-term resident in the United States and plan to leave, and you seek to eliminate or, at least, minimize the tax liabilities that may result, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.