Expatriate taxation, also referred to as exit tax, includes the tax treatment of individuals who either temporarily or permanently reside in a country other than their country of citizenship. Expatriate taxation issues are particularly complicated for U.S. citizens because the U.S. is the only major developed country that taxes its citizens on their worldwide income no matter whether or not they are resident in the United States; almost all other countries adopt a territorial-based system, taxing only those who are considered resident for tax purposes.

The U.S. imposes an expatriation tax on those who renounce their U.S. citizenship under sections 877 and 877A and long-term residents who have ended their U.S. resident status for tax purposes. Other countries also impose similar taxes, including Canada, which imposes a departure tax on individuals that are no longer tax resident in Canada, and the Netherlands, which imposes an emigration tax on Dutch nationals who move to certain countries.

The U.S. tax code allows qualified U.S. citizens and permanent residents who work in other countries to exclude a portion of income earned abroad. It also offers a foreign tax credit to U.S. citizens and permanent residents to prevent double taxation. All U.S. citizens and permanent residents are required to file U.S. federal tax returns annually if their income exceeds the minimum threshold. United States persons with one or more foreign bank accounts which reached an aggregated balance exceeding $10,000 at any point in the year must also file a Foreign Bank Account Report (FBAR) with the U.S. Treasury Department.

There are vocal groups, such as American Citizens Abroad, representing American citizens residing abroad that are pushing for residence-based taxation, since Americans who live abroad are, in their view, unfairly burdened because they are forced to pay taxes for public services and goods from which they derive no benefit. Moreover, the system is unfair for individuals who may have been born in the U.S. but have never lived there, according to these advocacy groups.

One particularly hot-button issue in expatriate taxation is the Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and took effect July 1, 2014. Under FATCA, foreign financial institutions (FFIs) are obliged to report to the IRS information on accounts held by all U.S. taxpayers living in the U.S. and abroad. Noncompliant FFIs are subject to a 30 percent withholding tax on U.S. investments. Also under FATCA, U.S. citizens with foreign financial assets exceeding $50,000 are required to report such assets annually using Form 8938, which is filed with the 1040 tax return. Expatriate groups harshly criticize FATCA, as it has led to FFIs dropping U.S. clients to mitigate their involvement with FATCA.

Tax Notes consistently and promptly publishes all relevant developments regarding expatriate taxation and IRS state tax information.