Exit Tax Book Chapter 9: Taxation of Nongrantor Trust Interest

Covered expatriates are subject to exit tax. For most types of assets, a pretend sale applies, and the covered expatriate must pay tax on gains (after an exclusion is applied) from the pretend sale of all their worldwide assets. This is referred to as the mark-to-market regime.

There are a few types of assets to which an exit tax still applies, but the exit tax works a little differently than for the mark-to-market assets. These are specified tax deferred accounts, deferred compensation, and interests in nongrantor trusts.

In the last couple months of this series, I covered how specified tax deferred accounts and deferred compensation are taxed.... continue reading

Exit Tax Book Chapter 8: Deferred Compensation

All covered expatriates must pay exit tax. The exit tax is computed differently depending on the type of asset.

Over the last two months, I discussed two types of exit tax: the mark-to-market regime, and the tax on specified tax deferred accounts.

For most assets, the mark-to-market regime applies. Specified tax deferred accounts are an exception to the mark-to-market rules: these accounts are subject to a pretend lump sum distribution of the full plan value on the day before expatriation date.

This month, I am discussing another type of asset that is excepted from the mark-to-market rules: deferred compensation. This includes stuff like pensions, stock options, etc.... continue reading

New IRS Expatriation Compliance Initiative

Recently the IRS announced that it will be rolling out a compliance initiative for expatriates.

There is no information about how this program will work just yet. Here is what the IRS news announcement says, and this is all we have to go on at the moment:

“U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.”

From this, it is a little unclear what we should expect, but one thing is obvious at a first glance: there is no mention of any options for voluntarily fixing tax compliance like taxpayers could do using the OVDP or the streamlined procedures.... continue reading

Exit Tax Book Chapter 7: Specified Tax Deferred Accounts

The exit tax applies to everything a covered expatriate owns. The method of calculating tax, however, differs depending on the asset involved.

For most types of assets, the mark-to-market tax applies. In the previous chapter, I discussed the rules for how to calculate the mark-to-market tax, the exclusion that applies, how to value your assets, and some special considerations.

In this chapter, I am discussing a type of asset that is excepted from the mark-to-market rules: specified tax deferred accounts. These are IRAs and other types of accounts that contain a tax deferral benefit. Covered expatriates must pretend that their specified tax deferred accounts were distributed to them in full on the day before their expatriation date and pay tax on the pretend distribution as if it were real.... continue reading

Exit Tax Book Chapter 6: Mark-to-Market Taxation

Last month, I explained how to determine if you are a covered or non-covered expatriate.

The major difference between covered and non-covered expatriates is that covered expatriates must pay exit tax, and non-covered expatriates do not.

The exit tax applies to everything a covered expatriate owns. The method of calculating tax, however, differs depending on the asset involved.

For most types of assets, the mark-to-market tax applies. To calculate exit tax under the mark-to-market rules, pretend that you sold everything you own on the day before you expatriated. Apply an exclusion to prevent tax on the first $713,000 of gain (for expatriations that occurred in 2018); pay tax on the rest.... continue reading