Individuals who are living or working abroad and considering renouncing their U.S. citizenship or forfeiting their green card face tax implications in the form of expatriation taxes, also known as exit taxes. Not everyone is subject to the exit tax, however, and those who are can avoid expatriation taxes through well-conceived tax planning strategies.
If you are concerned about your potential exposure to the U.S. exit tax, turn to Regal Tax & Law Group, P.C. We regularly advise individuals who intend to expatriate on their tax obligations and devise innovative strategies to reduce their tax liabilities. Whether you are pursuing opportunities abroad or reuniting with family, our experienced expatriation tax attorneys can help. Contact our office today for a consultation.
What are expatriation tax, or exit taxes?
Under U.S. tax law, the expatriation tax is a filing procedure you may be required to complete if you are giving up your citizenship or green card. In short, tax obligations on untaxed income must be settled once you cease to be a U.S. tax resident. The fact that you are permanently leaving the country does not necessarily mean you need to file for exit taxes, however.
The requirements for the exit tax are outlined in IRS Form 8854. Determining whether you are required to file exit taxes depends on two factors: your immigration status and your personal tax status.
Generally, holding U.S. citizenship status may subject you to exit taxes if the following criteria apply:
- U.S. citizenship — If you are renouncing your U.S. citizenship, the Internal Revenue Service (IRS) may require you to consolidate your tax affairs through an expatriation tax filing.
- Long-term residence — If you have resided in the US for 8 out of the last 15 years, whether you are a green card holder or U.S. citizen, you may also be subject to exit taxes.
If you are not a U.S. citizen or a long-term resident, you are not considered a “covered expatriate” and will not be subject to exit taxes.
Your Personal Tax Status
You may be considered a covered expatriate if one or more of the following conditions applies:
- Personal net-worth — Your personal net worth exceeds $2 million at the date of expatriation, excluding certain assets (e.g. your retirement plan).
- Personal tax liability — Your average annual net taxable income (minus deductions) for the 5 years before you expatriate is more than a set amount, adjusted for inflation.
- Tax compliance — You fail to certify on form 8854 that you have complied with all required federal tax obligations for the past 5 years.
Determining whether you are a covered expatriate and the final exit taxes you may be required to pay requires the informed representation our experienced exit tax attorneys provide.
How to Avoid U.S. Exit Taxes
Ultimately, the amount of exit tax you may be on the hook for depends on how your personal assets are structured and the market value of those assets, including unrealized capital gains. In short, you are taxed on the capital gains if you sell your assets on the date of expatriation.
At Regal Tax & Law Group, P.C., we are well-versed in the rules on exit taxes and work closely with covered expatriates to consolidate their tax affairs with the IRS. We also work with clients to help them arrange their finances in a way that can minimize their exposure to expatriate taxes.
Potential planning strategies include:
- Gifts — You can reduce your taxable net-worth below the $2 million thresholds by gifting your spouse and other individuals up to the annual gift exemption amount (currently $15,000 per year).
- Expatriate Trust — A properly structured and funded irrevocable trust can take ownership of your assets to lower your net-worth; however, the trust must be established 3 years prior to your expatriation date.
- Domicile Planning — By establishing a domicile outside of the U.S. 3 years prior to your expatriation date, you can take advantage of foreign domicile tax planning (transfers of non-U.S.-situs assets are not subject to transfer taxes).
- Minimize Capital Gains — Selling your home prior to expatriation for cash allows you to remove its value from the $2 million net-worth tests and avoid taxable gains.
Given the complexities involved in making transfers under IRS rules, particularly regarding the 3-year look-back period, it is crucial to consult with an experienced exit tax attorney well before you intend to renounce your citizenship or forfeit your green card.
Contact Our Experienced San Francisco U.S. Expatriation Tax Attorneys Today
If you are planning on becoming a U.S. expatriate and concerned about paying exit taxes, contact the experienced attorneys at Regal Tax & Law Group, P.C. For over 10 years, we have helped clients from all walks of life resolve the most complex U.S. tax issues. When you consult with us, you will have peace of mind knowing that you can pursue opportunities abroad while avoiding exit taxes. Contact our office today to learn how we can help.