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.
Today’s topic: A quick overview of the exit tax The term “exit tax” is not used or defined in the Code or regulations anywhere. It is a shorthand to describe the federal law that requires…continue reading
This week we are talking about dual-status returns. An email reader sent us this question, asking what his income tax return should look like in the year of expatriation: I file 1040 covering income up…continue reading
The impact of treaty elections on long-term resident status and expatriation Over the course of two days last week, I received three questions about the interaction of treaty elections, long-term resident status, and expatriation. It…continue reading
Of the three tests that an expatriate must meet to be non-covered, the certification test is the most difficult to understand. It is also the only test to which there are no exceptions – fail…continue reading
Today’s topic: Do covered expatriates get to use their suspended passive activity losses? Let us imagine that you are planning to expatriate in 2018, and that you will be a covered expatriate. You have a…continue reading