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.
Expatriation Articles
Check-the-Box Elections as an Anti-Form 5471 Damage-Control Technique
The Scenario A nonresident owns 100% of the stock of a foreign corporation, which holds highly appreciated foreign real estate. Real estate FMV $4,000x, basis...
Form 5471 Category 2 Filing Requirements and Triggers
This article looks at Category 2 filers. These are United States persons serving as officers and directors of foreign corporations. The lesson of this post...
Why Form 5471 Exists
Form 5471 exists because Subpart F (IRC §§951-965) exists. Or to be more precise, Form 5471 exists because Subpart F exists and taxpayers are smarter...