What Does the 8-Year Rule Mean?
This rule is a component of the Expatriation Tax, under U.S. federal law. It applies to certain individuals as presented below:
- U.S. citizens or lawful permanent residents (green card holders) for at least 8 of the last 15 tax years.
- Taxpayers who pass certain wealth, income or tax payment thresholds at the time of expatriation.
Core Triggers for the 8-Year Rule
In case any of the following criteria are met, individuals might be subject to expatriation tax:
- Net Worth Threshold: The net worth exceeds $2 million on the date of expatriation.
- Average Annual Tax Liability: The average annual federal tax liability over the past five years is above a specific amount (adjusted annually for inflation, e.g., $190,000 in 2024).
- Tax Compliance Certification: Individuals are unable to present sworn certification of compliance with federal tax obligations for the past five years.
How Does the Exit Tax Work?
In the case of an exit tax, certain assets are treated as if they were sold on the day before individuals are expatriated. The tax applies to any unrealized capital gains that exceed a certain amount determined for exclusion (e.g., $821,000 in 2024, adjusted for inflation).
Types of Assets Included
- Real estate and investments.
- Stocks, bonds and other securities.
- Interests in partnerships or businesses.
Does It Affect New York Exit Taxes?
The 8-year rule is unrelated to New York’s so-called “exit tax.” New York focuses on part-year resident and capital gains taxes when individuals relocate out of state. On the other hand, the 8-year rule is a federal measure designed for expatriation matters.
