With the dramatic election and recent chatter of leaving the United States, many citizens are interested in learning more about what it means to renounce citizenship with this country. It’s important to know the tax requirements for expatriates and the procedure for legally leaving the country before making an informed decision.
Many people assume that once they’ve renounced their citizenship with this country, they no longer have business with the IRS. However, there are still tax-related consequences for covered expatriates that can’t be avoided. As a full-service tax and accounting firm in NYC, we wanted to offer proper information on becoming an expatriate, as well as the tax requirements they must abide by.
What is an expatriate?
An expatriate is a United States citizen and legal resident who cuts all ties with the country. With the surrender of a passport, all citizenship rights are severed from the United States, and the person is free to pledge residency to a new country. For those who take up citizenship in a new country, expatriation is irrevocable and permanent.
Some expatriates are living in a different country temporarily and strictly for work purposes. Those who plan to return to the United States are considered temporary expatriates and must still adhere to the United States’ income tax regulations while they stay in their new country.
What taxes does an expatriate owe?
The United States requires an ‘exit tax’ from covered expatriates who have denounced their citizenship from the country. A covered expatriate is a United States citizen that holds a net worth of at least two million dollars, or had an annual average tax liability in the past five years of $161,000 or more. You are also considered as a covered expatriate if you fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of expatriation.
This exit tax is calculated based on a person’s assets. The gains that would have resulted that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. For those considering expatriation with over two million dollars in assets, this exit tax can be a crucial part of their decision to stay or go. The IRS will consider all unrealized capital gains and all IRA’s and retirement vehicles to calculate the exit tax owed according to the deemed sale rule.
Is there a way to avoid taxes as an expatriate?
The only way to avoid the exit tax is to eliminate your qualifications as a covered expatriate. Gifting property and assets to lower net worth may be a strategy to disqualify you as a covered expatriate. Using different planning techniques to lower capital gains can also take you out of the covered expatriate category. Nonetheless, a covered expatriate may elect to defer payment of the tax due under Section 877A, on an asset-by-asset basis, until the earlier of an actual sale of the asset in question or the expatriate’s death. You should also be aware that you will still be entitled to Social Security, retirement plan or Medicare benefits after expatriation.
If you’re considering renouncing citizenship to the United States, it’s important to know the severe tax consequences you may be required to face. Learning about expatriation and what it means for your financial and geographical situation is important before making a move.
Interested in knowing more about the taxes associated with leaving the country? Call 212 Tax & Accounting Services for more information today!