Should I Stay or Should I Go? Tax Considerations in U.S. Expatriation

When U.S. citizens decide to give up their citizenship (expatriate), they may still have to pay taxes even after they leave. This is especially true for certain “covered expatriates.” These tax rules can be complex and may cause problems for people who want to leave the country. It’s important for people thinking about expatriating to get advice from both an immigration lawyer and a tax advisor. Also, there are laws that could make it difficult for expatriates to come back to the U.S. if they leave to avoid paying taxes. A “covered expatriate” is a category of expatriates (people who give up their U.S. citizenship) who are subject to a special tax. It’s important to figure out if someone will be a covered expatriate before they give up their citizenship, so you can understand how it will affect their taxes and their estate plan. An expatriate is someone who gives up their U.S. citizenship or green card. This can happen by renouncing their citizenship at a U.S. embassy or consulate, getting citizenship in another country, serving in another country’s military against the U.S., or holding certain non-U.S. government positions. Long-term green card holders can also be considered expatriates if they give up their green card and stop being a U.S. resident. The date a person gives up their citizenship or green card is called their “expatriation date”, and it affects their taxes. If you’re an expatriate (living abroad), you might have to pay U.S. taxes if you’re considered a “covered” expatriate. You’re considered covered if either:
1. Your average annual net income tax for the 5 years before you left the U.S. is more than $151,000
OR
2. Your net worth is more than $2 million when you leave the U.S.
If you meet these criteria, you might have to pay taxes to the U.S. government even though you’re living in another country. If you leave the U.S., you must prove that you’ve paid all your taxes for the past five years to avoid being considered a covered expatriate. There are a few exceptions, like if you were a citizen of another country when you were born and you haven’t lived in the U.S. for very long. If you’re still considered a resident for tax purposes, you’re also exempt. The exit tax applies to expatriates who are considered “covered expatriates,” and it treats their expatriation as if they sold all their property the day before leaving. This means they have to pay taxes on any gains from the deemed sale, even if they wouldn’t normally have to pay taxes. The IRS considers all the expatriate’s property, including their interest in trusts, as part of the exit tax. If the expatriate is considered the owner of a trust, all the trust’s assets are subject to the exit tax. If the trust is not considered a grantor trust after the expatriate leaves, there may also be gain recognition for the trust’s assets. This means the trust may have to pay taxes on any gains it made as well. If someone gives up their U.S. citizenship and has a trust, any money or property they get from the trust is taxed at 30%. The value of their assets is calculated using regular rules for transferring property. This means that they might be able to use estate planning strategies to lower their tax bill before they give up their citizenship. If someone gives up their U.S. citizenship, they might have to pay a tax on their property and assets. But they can exclude up to $651,000 of the profit they made from their assets. There are some exceptions for retirement accounts and certain types of savings accounts. They can also choose to delay paying the tax, but they’ll have to pay interest on it. When someone gives up their US citizenship, they might have to pay taxes on all their assets. But the timing of when they leave could affect how much tax they have to pay. If they leave when their assets are worth a lot, they might have to pay more tax than if they had stayed in the US. Also, they might end up paying taxes in the US and in their new country. This could be a big problem, especially if their assets lose value after they leave. If an American person gets a gift or inheritance from someone who renounced their citizenship (called a “covered gift or bequest”), they have to pay a special tax. The tax is based on the value of the gift or inheritance multiplied by the highest estate tax rate. But there are some exceptions, like if the property would already be subject to U.S. estate or gift tax. Recipients of these gifts or inheritances can also exclude a certain amount from the tax each year. When someone gives a gift or inheritance to a trust, the succession tax applies, and the trust is responsible for paying it. If the trust is in the U.S., it pays the tax as if it were a U.S. citizen. If the trust is outside the U.S., the tax is imposed on any money that is given to someone in the U.S. A non-U.S. trust can choose to be treated as a U.S. trust for tax purposes. There are no specific rules for how the gift or inheritance should be treated for generation-skipping transfer (GST) tax purposes, so it’s not clear if this tax would apply in these cases. If you’re thinking about leaving the U.S. and might become a “covered expatriate,” there are some ways to minimize the taxes you might have to pay. One way is to use valuation discounts, which can lower the amount of money you owe when you leave. Another option is to set up a trust before you leave, so you can use up any tax credits you have left. This can help reduce the taxes your family might have to pay later on. It’s important to think carefully about how the trust is set up, though, to make sure you don’t end up owing more taxes later. If you’re thinking about giving up your U.S. citizenship or green card, it’s important to understand the tax implications and potential ways to save money. Even though expatriating may help you save on taxes, it’s not a guaranteed solution. There are a lot of factors to consider, like the timing of expatriation, where potential beneficiaries live, and if you can use special planning techniques to lower taxes. It’s a complex decision that requires careful consideration. This passage discusses tax laws and expatriation, focusing on the implications for individuals who renounce their U.S. citizenship.

Source: https://www.floridabar.org/the-florida-bar-journal/should-i-stay-or-should-i-go-tax-considerations-in-u-s-expatriation/