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Thinking about expatriation? Beware the Exit Tax.

The IRS's continued focus on offshore assets has led some American citizens and green card holders to at least consider the possibility of expatriation. Considering the gravity of this decision, citizens and permanent residents must account for many factors. One such factor is the Expatriation Tax, more commonly referred to as the Exit Tax.

Who pays the Exit Tax?
The Exit Tax is potentially triggered when any of the following conditions are met:

  • Your total net worth (not just American net worth) is valued at $2 million or more upon expatriation. Married couples may be able to have a total net worth of up to $4 million without triggering the Exit Tax.
  • Your average net annual income tax liability for the past five years is $162,000 or more. Note that this figure is subject to change based upon inflation.
  • You did not certify that you complied with federal tax regulations for the previous five years on Form 8854, the Initial and Annual Expatriation Statement.

Not all expatriates or lawful permanent residents who relinquish their green cards must pay the Exit Tax. Rather, the Exit Tax typically applies to two classes of individuals: (1) those with relatively substantial net worth and (2) those who failed to certify that they followed applicable tax regulations. Anyone potentially eligible to pay the Exit Tax is known as a "covered expatriate."

How do you calculate the Exit Tax?

The Exit Tax is calculated as follows: the taxpayer must pay taxes on the value of his or her assets based on their value the day before he or she is deemed to have expatriated the United States. Currently, capital gains are taxed as high as 23.8%. The first $699,000 (or $1,398,000 for spouses) in gains are exempt from the Exit Tax, however.

Some potential strategies to mitigate the impact of the Exit Tax or avoid it altogether are:

  • Married couples filing separately may lower their average net annual income tax liability, and therefore avoid triggering the Exit Tax.
  • If one spouse is expatriating and the other spouse is not a U.S. Citizen, the expatriating spouse could take advantage of the annual exclusion of gifts. Currently, this exclusion is $149,000.

Deferring payment on the Exit Tax is an option, although interest will accrue on the unpaid taxes. The IRS is likely to require you to post a bond as well.

Any person or family thinking about expatriation needs to carefully consider all of the issues in play. Skilled legal representation is essential. For decades, taxpayers across the United States and the globe have relied on the attorneys of Goldburd McCone.

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