Giving Up Your Green Card? Be Prepared for This Surprise

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.

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 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.

Tax Non-Compliance
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 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​.
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