IWTA International Wealth Tax Advisors

The rules governing taxation on worldwide income and assets begins the moment a person becomes a U.S. income tax resident by means of the following criteria by:

• • Residing in the U.S. for more than 183 days during a calendar year OR

• • Being in the U.S. for more than an average of 121 days per year for a three-year period, OR

• • Obtaining a “green card” (permanent resident status) OR

• • Becoming a U.S. citizen

If a person meets any of these criteria, they will be subject to tax on income from whatever source (domestic or foreign). They will be required to disclose their foreign financial activities and interest in foreign assets regardless if such activities produce income and regardless of their ownership percentage.  Additionally, the gain on the sale of assets (domestic or foreign) is computed as the difference between the original cost (regardless if obtained before U.S. tax status) and the sale price.

In addition, with income tax residency, the U.S. imposes a significant tax on the assets of an individual upon their death or at the time they transfer the ownership of such assets to another person during their life.  The tax at the time of transfer (death or during life) can be as high as 40{105615a82985984cf1704e8776ec685e1345b73ddec43811fd3f038097961455} of the value, not cost, of the asset(s).

With the appropriate planning a significant amount of tax and trouble can be saved.

An increasing number of U.S. citizens are renouncing U.S. citizenship, deciding that their citizenship or green card status does not provide sufficient benefit for the related obligations. Many who are renouncing their U.S. citizenship and green cards are doing so at a steep price.

Expatriation, the act of renouncing one’s U.S. citizenship or long-term resident (green card holder) status, is often done for tax purposes. But there’s a catch in the form of an expatriation tax, or “exit tax.” This tax often takes the form of a capital gains tax against unrealized gains attributable to the period in which the taxpayer was a tax resident or citizen. Expatriation is certainly not for everyone—but, if you’re an individual who thinks it might make sense, continue on for more information.

Despite an ongoing uproar from Congress and the general unpopularity of the move among the U.S. public, a record-breaking number of U.S. citizens (5,132) renounced their citizenship in 2017—something experts are attributing to the increasing burden of U.S. tax compliance heralded in by FATCA, and the international information returns like the FBAR.

See our blog post on Voluntary Disclosure here.

Before pulling the trigger, U.S. taxpayers should be sure the benefits outweigh the costs. If they decide to hand their passport back to Uncle Sam and permanently reside outside the U.S., here are some things U.S. taxpayers should know:

1. 1. Clean Break: Depending on the date a taxpayer expatriates, different rules apply. The most recent rules (IRC Section 877A) apply to individuals who expatriated after June 17, 2008, and who meet the following conditions:
      • Their average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($151,000 for 2012, $155,000 for 2013, $157,000 for 2014, $160,000 for 2015, and, most recently, $165,000 for 2018).
      • Their net worth is $2 million or more on the date of their expatriation or termination of residency.
      • They fail to certify on Form 8854 that they have complied with all U.S. federal tax obligations for the five years preceding the date of their expatriation or termination of residency. Additionally, if a U.S. taxpayer expatriated but never filed a final U.S. tax return with Form 8854 included, they will be treated as still being a U.S. income tax resident under U.S. law.

• 1. Making it Official: Depending on the date a taxpayer expatriates, different rules apply.
  • • The date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States, provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State.
      1.  
    • The date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality that confirms the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)). This is provided that the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. State Department.
      1.  
    • The date the U.S. Department of State issues the individual a certificate of loss of nationality; OR
      1.  
    • The date a U.S. court cancels a naturalized citizen’s certificate of naturalization.

1. The Exit Tax: Oh, but there is a catch.  As mentioned, there is a tax for the right to give up U.S. status.  
2. The Estate Tax Catch: Think of this as a citizen’s exit tax from the planet. Currently, U.S. citizens can shield up to $11.4 million of property from the estate tax. But non-U.S. citizens can only shield $60,000. That’s a lot of money to leave on the table as a taxpayer departs this world for the next.
3. The Gift (Tax) That Keeps on Giving: The U.S. gift tax also comes into play when a U.S. citizen renounces their citizenship. In general, gifts by a covered expatriate to any U.S. persons are subject to a 40 percent tax. For instance, a U.S. citizen can give their spouse property without triggering the gift tax. But a gift to a non-U.S. spouse is subject to the annual exclusion limitation. Gifts by a covered expatriate to a non-U.S. spouse are not taxed after expatriation but are taxable to U.S. persons (tax residents).
4. Paying Your Debts: If a taxpayer isn’t a wealthy individual, expatriation requires proving that they’ve paid their taxes for the past five years and met all the filing obligations.
5. Voluntary Disclosure: If a U.S. person has expatriated but never filed a proper final U.S. income tax return as noted above or they do not meet the above “covered expatriate” criteria and have not filed all their tax returns before expatriating they may to want to consider a voluntary disclosure in order to make their expatriation effective for U.S. tax purposes. (See our blog post on Voluntary Disclosure here.)

More and more people are expatriating. For some, it can be an act of conscience. For others, particularly ultra-high net worth individuals, it’s less emotional and more of a business decision.

U.S. expat taxes and pre-immigration taxes are complicated. For a more in-depth analysis and strategy for entering or exiting the U.S. tax system, contact us to speak with a skilled international tax practitioner or book an appointment with IWTA’s Founder, Jack Brister. ITWA provides in-depth knowledge and expertise as international tax accountants and also provides expatriate tax services.