The IRS has been embroiled in a seemingly endless battle with offshore
tax evasion for many years, and every year cracks down even harder on
new ways for individuals to keep their wealth out of the United States.
Many different people choose to take this route for tax purposes, including
both United States citizens and permanent residents, and as a result many
people with substantial assets invested overseas are considering leaving
the country to avoid the immense tax burden. However, expatriating can
carry some nasty surprises you have to prepare for.
The Exit Tax
For U.S. citizens or long-term residents, leaving the United States permanently
can subject them to what is known as the U.S. exit tax. This tax is levied
on anyone who formally renounces their citizenship or returns to the country
which they hold a passport from. The tax is essentially computed as if
you sold your entire estate and all your assets the day before you leave
the country and then reported the income you obtained from it. Currently,
this tax can be as high as just under 24%.
Who is subjected to this tax? Long-term residents are any lawful permanent
resident (Green Card holder) who has lived in the United States for at
least eight of the 15 years before they end their residency. You are
not treated as a Green Card holder for any years where you are treated as a
resident of a foreign country, but holding your Green Card for even one
day per year considers the entire year as part of your U.S. residency.
Three Exit Tax Triggers
Even if you fulfill the residency requirement, expatriating still only
triggers the exit tax if you fulfill one of three criteria.
Total Net Worth
The magic number here is $2 million. If the aggregate net value of your
assets located in all of your
worldwide accounts totals more than $2 million, then you are subjected to this tax.
This is treated on an individual basis; if you are married, your spouse’s
net worth will be calculated separately. If you and your spouse combined
have less than $4 million, you could theoretically distribute your assets
between each of you to keep your net worth down. This can be done through
gifting, but be aware gifts could be subjected to the U.S. gift tax if
the receiving spouse is not a U.S. citizen.
The second trigger for the exit tax is total tax liability. If your average
tax liability on your income over the last five years is over $162,000,
you will be required to pay an exit tax. This number is the same for both
married and single individuals, so if you are married and filing joint
taxes, the liability number used will be your joint return, not your individual
burden. Some couples who plan ahead will file individual returns for several
years before expatriating to stay below this number.
Finally, you will be considered eligible for this exit tax if you cannot
show you have been fully tax-compliant for five years. If you didn’t
file for one year or made an error in a previous return, you will be required
to pay an exit tax. However, you can amend a previous tax return and fix
these errors while simultaneously filing expatriation paperwork. Once
you’ve signed your last amended tax document, you can sign your
If you want to avoid this tremendous tax burden, an Orlando international
tax attorney from
Castro & Co. can help! We have offices located around the country to serve a wide range
of clients and help them with all of their tax law matters. We understand
how important it is to have reputable, trustworthy counsel when developing
a sophisticated tax plan, and we take pride in helping so many companies
and individuals find a successful solution to their needs.
If you are considering expatriating from the United States, get help avoiding
the exit tax from Castro & Co.
Call us today by dialing 888.595.5088.