U.S. citizens and permanent residents pay income tax on their worldwide income. If sufficiently wealthy, their worldwide assets are taxed when they die. This is true no matter where they live. Every year, more and more people are relinquishing their U.S. citizenship or giving up their green card (permanent resident) visa status.
This means that they are leaving the U.S. tax net. As they leave, the United States seeks its last chance to impose tax. This is called the “exit tax.” Section 877A of the Internal Revenue Code.
If you are rich enough (as defined by the U.S. government) or your tax paperwork is not in order, the Internal Revenue Service pretends that you sold everything you own on the day before you relinquished your citizenship. After applying an exemption amount ($651,000 in 2012) you pay tax on the “pretend” sale. The Internal Revenue Service pretends that you received all of your IRA balances on the day before you relinquished your citizenship. That’s all taxable income to you.
There are a number of other special tax rules that may create an enormous tax liability to the United States, just because you gave up your U.S. citizenship or green card visa. Even if you are not rich (again, “not rich” is defined by the U.S. government, not by you), you will still face a mountain of tax paperwork that needs to be filed correctly and on time.
We know these tax rules, perhaps better than anyone else, because we counsel so many people throughout this process. Let us help you – from your initial questions when you first consider this action, through the tax planning before you relinquish citizenship, and filing the tax returns afterwards.
Category 5 Workflow Installment 1. Why 5a/5b/5c Exist.
Figuring out Categories 5a/5b/5c, in five installments I want to help you figure out which box to check (or not!) in Item B of Form...
When Do You File Form 5472 for a Domestic Single-Member LLC?
This topic is from real life, and will help you this tax season when confronted with a holding structure that looks like the one discussed...
U.S. Citizen Married to Nonresident Alien Shareholder = Form 5471?
This is a lengthy discussion of a common fact pattern: When does a U.S. citizen spouse have a Form 5471 filing requirement, merely by being...