The IRS has been embroiled in a seemingly endless battle with offshore tax evasion for many years, and every year cracks down on new ways for individuals to escape US taxation of their wealth. One method for achieving this goal is to expatriate from the United States to no longer be subject to the taxing jurisdiction of the US. 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 a potential immense tax burden that would be incurred if they brought their money back into the United States. However, expatriating can carry some nasty surprises for the unprepared.
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 surrenders a green card that they have held for at least 8 of the last 15 years. For computation of the tax, you are treated as if you sold your entire estate and all your assets the day before you leave the country and then reported all income that would have been obtained from such a sale. The US would then assess a tax on the income based on the character of the assets at the time the tax is assessed. Typically, most of the assets will be taxed around 24%, but it is possible that the tax rate could be even higher.
Who is subjected to this tax? U.S. Citizens and Long-term residents who also meet one of three criteria discussed below. Anyone who meets these criteria become known as “covered expatriates” and are subject to the “exit tax.” Long-term residents are permanent residents (Green Card holders) who have 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 in the United States will be sufficient to include 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 worldwide assets totals more than $2 million, then you are subjected to this tax. This is examined 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, it may be possible to distribute your assets between the two of you to keep your net worth below the $2 million threshold. 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.
Tax Liability
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 in excess of $162,000, you will be subject to the 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. Often it is advantageous for couples to plan ahead and begin filing individual returns for several years before expatriating to keep their average individual tax liabilities under $162,000.
Tax Non-Compliance
Finally, you will be subject to the exit tax if you cannot show you have been fully tax-compliant for five years. If you did not file for one year or made an error in a previous return, you will be subject to the exit tax. However, you can amend a previous tax return and fix these errors while simultaneously filing expatriation paperwork. Once you have signed your last amended tax document, you can sign your Form 8854.
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.