As the US imposes income tax on the worldwide income of its citizens and green card holders, even if they reside overseas, it is becoming increasingly popular for such individuals to consider relinquishing their US citizenship or Green Card with the hope of freeing themselves from the US tax system.

If an individual is considering this they need to be aware if they are subject to an exit tax and treated as if all assets were sold on the day before the expatriation date. There are many issues to consider, including the following:

  • whether the individual is a “covered expatriate” and is therefore subject to the expatriation rules – this will be the case which they will be if they are a US citizen or “former long-term resident” who meets any of the following three tests:
    • “Net Income Tax Test” – for the 5 years before expatriation, their average annual US tax liability (after foreign tax credits) is at least $160,000 (2015 rate)
    • “Net Worth Test” – their net worth is at least $2m
    • “Certification Test” – they fail to certify that they satisfied all applicable US tax obligations for the 5 years before expatriation
  • Have all US tax obligations been met. This includes the FinCEN 114 (the FBAR) as well as informational filings for certain interests in foreign trusts, companies and partnerships as well as regular income tax returns
  • Green Card holders are considered “former long-term residents” if they held a Green Card for any portion of at least 8 of the 15 tax years preceding expatriation. Care should be taken as one day is considered a portion of a tax year
  • The date that a US citizen renounces their citizenship is usually the date that they do so before a diplomatic or consular officer of the US, while for a Green Card holder it is the date they cease to be a lawful permanent resident of the US. This is either when the Green Card has been revoked or abandoned or the 1st day of a tax year that they claim to be a resident of a foreign country under a double tax treaty with the US
  • If an individual is subject to the rules they are deemed to have sold all assets on the day before they expatriate for fair market value. Losses may be taken into account, but only to the extent of gains. The first $690,000 of net gain is excluded per person. A basis adjustment is applied to all property subject to the deemed sale provision so that an actual sale does not result in double taxation
  • This exclusion does not apply to certain deferred compensation assets or interests in foreign trusts, for which there are special rules
  • If an individual does not have the funds available to pay the tax it can be deferred but interest will be charged
  • There are two very limited exceptions to the rules for certain dual citizens and certain minors. If an individual qualifies for one of these exceptions they will not be subject to the exit tax even if they meet the net worth or net income tax tests or fail to meet the certification requirement
  • A US person who receives a gift from a covered expatriate is subject to US tax on receipt of such gift to the extent it exceeds the annual gift tax exclusion of $14,000 (2015 rate), with gift tax applied at the highest applicable gift tax rate at the time of the gift (40% in 2015)
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