Form 1040-C, also known as the “U.S. Departing Alien Income Tax Return,” is a crucial filing requirement for nonresident aliens and resident aliens who intend to leave the United States permanently or for an extended period. Its primary purpose is to ensure the proper reporting and payment of tax obligations before a taxpayer exits the country. One of the core considerations in filing this form involves the determination of U.S. residency status, especially under tax treaties. In 2025, the IRS issued revised instructions to clarify the 8-year treaty residency requirement, which impacts eligibility for tax benefits and the triggering of expatriation tax rules.
What Is Form 1040-C?
Form 1040-C is filed by certain aliens who are departing the U.S. and must settle their tax affairs before leaving. It functions as a departure tax return that is submitted in advance of a taxpayer’s exit. The form is often used by:
- Resident aliens who terminate U.S. residency
- Nonresident aliens with U.S.-source income
- Green card holders giving up their lawful permanent resident status
- Individuals relinquishing citizenship who are subject to expatriation tax rules
Before leaving the United States, these individuals may be required to obtain a tax clearance certificate from the IRS, which is processed through Form 1040-C. The form provides a snapshot of the taxpayer’s income and tax liability for the year up to the date of departure.
Revised 2025 Instructions: What Changed?
In 2025, the IRS issued updated guidance clarifying how treaty residency elections interact with the 8-year rule under IRC Section 877A and the expatriation rules. Specifically, the revisions pertain to the calculation of the 8-year residency threshold for individuals claiming tax treaty benefits to treat themselves as nonresidents for certain years.
Previously, there was ambiguity over whether a year in which a taxpayer claimed treaty residency in another country (and thus filed as a nonresident under the treaty) counted toward the 8-year residency test. The 2025 update clarifies that:
- Any year in which a taxpayer is treated as a U.S. resident under domestic law, but elects to be treated as a resident of a treaty country under a valid treaty election (e.g., Article 4 of the OECD Model), still counts toward the 8-year test for determining long-term residency under Section 877(e).
This means that individuals who have used a treaty tie-breaker rule to avoid taxation as U.S. residents cannot exclude those years from the 8-year count if they were otherwise U.S. residents under the Internal Revenue Code.
Understanding the 8-Year Residency Rule
Under Section 877A of the Internal Revenue Code, individuals who are classified as “long-term residents” are subject to special expatriation tax rules when they give up their green card or citizenship. A long-term resident is defined as someone who has held the status of a U.S. resident for at least 8 of the last 15 tax years before the year of expatriation.
The 8-year rule is critical because once an individual meets this threshold, they are potentially subject to the exit tax, which includes:
- A deemed sale of worldwide assets on the day before expatriation
- Immediate recognition of gain, subject to an exemption threshold ($866,000 for 2025)
- Potential withholding and information reporting obligations
The 2025 update makes clear that years during which a taxpayer relied on a treaty position to be treated as a nonresident still count toward the 8-year test if the taxpayer met the domestic criteria for U.S. residency under IRC §7701(b).
Impact on Form 1040-C Filers
This clarification affects how departing aliens evaluate their expatriation exposure and file Form 1040-C. Specifically, taxpayers must:
- Review their past 15 years of residency status under both domestic law and any treaty positions taken
- Count all years in which they met U.S. residency rules—even if a treaty election was made—as part of the 8-year test
- Prepare to file Form 8854 (Initial and Annual Expatriation Statement) if deemed a covered expatriate
Taxpayers attempting to rely on treaty positions to avoid the exit tax must now recognize that doing so does not exempt them from long-term resident classification under Section 877A.
Form 1040-C vs. Form 8854
While Form 1040-C is a departure return, Form 8854 is required to report information about expatriation under the exit tax rules. The IRS requires:
- Form 1040-C: Filed prior to departure from the U.S. for advance tax clearance
- Form 8854: Filed by expatriates (including long-term residents) who renounce their citizenship or green card and meet the covered expatriate thresholds
Many taxpayers will need to file both forms, especially if they meet the 8-year rule. The revised 2025 guidance underscores the importance of tracking residency years carefully.
Consequences of Expatriation as a Covered Expatriate
If a taxpayer is classified as a covered expatriate under the exit tax rules, they may be subject to the following:
- Mark-to-market taxation: Deemed sale of most worldwide assets at fair market value
- Tax on deferred compensation items: Including pensions, retirement accounts, and stock options
- 15% withholding on certain U.S.-source income after expatriation
- Bar on reentry: In extreme cases, former citizens who expatriated to avoid tax may be deemed inadmissible under immigration law (Reed Amendment)
These potential consequences make understanding the revised 8-year rule all the more important for Form 1040-C filers planning permanent departure.
Practical Steps for Compliance
To comply with the updated 2025 rules related to Form 1040-C and the 8-year treaty residency requirement, taxpayers should:
- Review immigration and tax records for the last 15 years to determine U.S. residency status
- Identify any treaty elections made under tax treaties (especially Article 4) and how those years align with U.S. residency under domestic rules
- Consult a tax professional familiar with expatriation planning, Form 8854, and treaty interpretation
- File Form 1040-C in advance of departure to obtain IRS clearance and avoid future tax issues
- Prepare Form 8854 if the 8-year test is met and other covered expatriate conditions apply (e.g., net worth > $2 million or average tax liability over threshold)
Conclusion
The 2025 updates to Form 1040-C instructions offer important clarification regarding the interaction between U.S. domestic residency law and treaty-based nonresident elections. The key takeaway is that treaty elections do not exempt taxpayers from being counted as U.S. residents for purposes of the 8-year expatriation test.
Departing aliens, green card holders, and long-term residents should plan accordingly and seek professional tax guidance to ensure compliance with the expatriation tax regime. Filing Form 1040-C correctly, understanding the implications of treaty claims, and complying with Section 877A are all critical to a successful and penalty-free exit from the U.S. tax system.
