The U.S. imposes tax on worldwide income without taking into consideration where its citizens or Greencard holders (GCH) reside. Recent data indicates that many dual citizens and GCHs living outside the US are expatriating in significant numbers to alleviate themselves of their annual U.S. tax burden. The U.S. Federal Register showed that 5,816 renunciations were recorded in the first six months of 2020, a significant increase from 2019. Given the current high level of uncertainty and far-reaching consequences of COVID-19 on world economies, now could be the ideal time to expatriate in considering if your net worth exceeds the $2 million threshold. The main question for most contemplating expatriation is what are the tax consequences?
An American citizen or GCH is a covered expatriate if:
- Your average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than $171,000 (2020)
- Your net worth is $2 million or more on the date of your expatriation or termination of residency. Deloitte View: Various planning opportunities exist to reduce net worth below the stated $2 million threshold. Gifting appreciated assets to a spouse or nonresident alien (NRA) spouse, which is subject to thresholds, is one option
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. This includes form FinCEN 114 (FBAR).
GCHs are only subject to “Exit Tax” if they have held their greencard for at least 8 of the 15 tax years preceding expatriation and meet any of the three tests above. Deloitte View: If you are a GCH and have not yet held the greencard for 8 years, consider expatriating before falling into the 8-year criteria.
The date of expatriation for a US citizen is the date they appear before a US diplomatic or consular office. For GCHs it is the day they cease to be a lawful permanent resident of the US. Deloitte View: GCHs beware – you remain liable for US tax until the resident status is deemed “abandoned” administratively or judicially by USCIS or a consular official. Expired GCs are not deemed “abandoned”.
As a covered expatriate, you are subject to income tax on the net unrealized gain (Fair Market Value (FMV) - Adjusted Basis) on your property as if the property had been sold for its FMV on the day before your expatriation date. Net unrealized gains are then reduced by $737,000 (2020), but not below zero. Exit tax is determined on many factors and depends on the income type and source. Deloitte View: An in-depth analysis by U.S. tax professionals is required to determine someone’s potential exposure to exit tax. Mark-to-Market tax does not apply to eligible/ineligible deferred compensation items, specified deferred accounts, and interest in nongrantor trusts. Special rules apply.
Exit Tax Exception For A “Dual Citizen & Minor”
If a dual citizen fails the first two “covered expatriate” tests (net income test & net worth test) then the individual can still be exempt from exit tax if certain criteria are met:
- US citizen at birth and a citizen of another country at birth
- On the date of expatriation the individual continues to be a citizen and to be taxed as a resident of that other country, and
- You have not been a resident of the US for not more than 10 taxable years during the 15-tax-year period ending with the expatriation year.
A minor can qualify for the exception if both of the following requirements are met:
- Individual expatriated before they were 18 ½ years old.
- Individual was a resident of the United States, determined under the substantial presence test, for not more than 10 tax years before the expatriation occurs.
These individuals still need to meet point 3 of the “covered expatriate” criteria. If you are not compliant with your U.S. federal tax obligations for the 5 years preceding expatriation then you can potentially enter the “Streamline Procedure” to become compliant with the IRS, as long as your non-compliance was not due to wilful misconduct.
These individuals still need to meet point 3 of the “covered expatriate” criteria. If you are not compliant with your U.S. federal tax obligations for the 5 years preceding expatriation then you can potentially enter the “Streamline Procedure” to become compliant with the IRS, as long as your non-compliance was not due to wilful misconduct.
Gifts
After expatriation, if a “covered expatriate” gifts an asset to a US person, then that US person is subject to US tax on receipt of the gift if it exceeds the annual gift tax exclusion of $15,000 (2021). The gift will be taxed at the highest gift tax rate of 40%. Deloitte View: Gift before you expatriate to avoid passing the tax burden on to people you care about.
If you would like to discuss more on this topic, please reach out to our key contacts below.
Find out more about US tax challenges and our solutions
Key contacts
Geoffrey Leys
Director, Global Employer Services
Alexander Saluveer
Senior Manager, Global Employer Services
Andrew Morgan
Senior Manager, Global Employer Services
Mathew Butler
Manager, Global Employer Services
