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Expatriation Exit Tax

Expatriation – Giving Up Your U.S. Citizenship Is a Taxing Experience

Multi-national planning can include deciding choosing where you will be a citizen.  Sometimes the tax grass appears greener on the other side of the proverbial fence.  Jump the fence and giving up your U.S. citizenship, can trigger an Expatriation Tax.  There are three tests that determine whether or not you will owe such a tax.

  • The Income Test.  You will owe a tax if your average annual U.S. income tax liability over the 5 years prior to expatriation was over $145,000 in 2010 dollars, adjusted annually for inflation.
  • The Net Worth Test.  You will owe a tax if your net worth is $2 million or more.
  • Compliance.  You will owe a tax if you are not in compliance with all U.S. Tax obligations in a five year period prior to expatriation.

If you meet any one of these tests, you are a “covered expatriate” and will owe the so-called exit tax.

The exit tax is calculated based on the “deemed sale” of all your assets wherever situated as if you sold them the day before you expatriated.  Any time you actually sell an asset, there may or may not be a tax depending on a number of factors.  The most typical tax is a capital gain tax where the sale price is greater than your cost basis.  The tax rate may vary based on how long you have held the asset, its depreciation, and other factors.  In this situation, the act of exiting the U.S. is essentially treated as selling your assets, and you pay the resulting taxes.  The assets subject to this tax are all world wide assets including in your taxable estate if you were to die.  As of 2010 the first $627,000 of gain is exempt.

Another tax consequence of expatriating is that from then on, any gifts to U.S. persons you make as a “covered expatriate” are subject to gift taxes.  Like any other gift, your annual exclusion amount is exempt, and after that the marginal gift tax rate applies.  You no longer have a lifetime exclusion.

Certain retirement assets such as an IRA or 401k is NOT part of the deemed sale.  Instead, these assets are subject to mandatory withholding as distributions are made.  This requires you to complete Form W-8CE.

Expatriating requires you to file Form 8854.

Now Where?

Where to go?  That is the toughest question.  My counsel among other factors is to pick a place where you want to actually be.  There is a lot more to consider than just the taxes.  Here is one comparison chart between Dominica, St.Kitts & Nevis, Austria.

Where is the so-called “promised land?”  Expatriation is a big decision that should never be taken lightly.  It is helpful to seek the counsel of those who have seen both the pros and the cons.  Carefully considering your options will help you be grateful for your choice when you have to live with the consequences long after you have made the choice.  The initial consultation is complimentary.

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