Chapter 10 – Estate and gift tax for the covered expatriate

November 19, 2015 - admin

Chapter 10 – Estate and gift tax for the covered expatriate

Money cannot flow back to the United States from a Covered Expatriate by gift or inheritance, except with a massive tax cost.

Section 1.  How It Works

Covered Expatriates have a disincentive to make gifts to U.S. persons. They also have a disincentive to leave a bequest to a U.S. person when they die.

Tax on Recipient

Anyone who receives a gift or inheritance from a Covered Expatriate must pay tax at the highest gift tax rate. The recipient pays the tax.


The usual exemptions in the gift tax laws apply. The Covered Expatriate can give $14,000 per year (the current gift tax exemption amount for 2013; this is indexed for inflation) without problem.... continue reading

November 19, 2015 - admin

Chapter 9 – Taxation of nongrantor trust interests

Covered Expatriates who are beneficiaries of nongrantor trusts face another tax problem.  Beneficial interests in nongrantor trusts are subjected to the exit tax.  Generally, you face 30% withholding as distributions are made, but you can elect to be taxed in a lump sum.

Section 1.  Nongrantor Trust Interests

The mark-to-market rules do not apply to an interest in a nongrantor trust. A Covered Expatriate who is a beneficiary of such a trust will be subjected to taxation under special rules.

Nongrantor Trust

A nongrantor trust is any trust where the Covered Expatriate is not the owner under the normal grantor trust rules.... continue reading

November 19, 2015 - admin

Chapter 8 – Taxation of deferred compensation

Deferred compensation items (think “pensions”) will either be taxed as a lump-sum distribution or tax will be withheld as distributions are made to you. This applies, however, only to Covered Expatriates.

This stuff is strange and you really should hire an expert to figure this out for you.

Section 1.  What Are They?

The mark-to-market taxation rules explicitly do not apply to any “deferred compensation item.” Instead, the tax treatment depends on whether the item is an “eligible deferred compensation item” or an “ineligible deferred compensation item.”

An “eligible deferred compensation item” is taxed at a flat 30% rate. When the payor makes a payment to the Covered Expatriate, 30% of the payment is withheld as tax.... continue reading

November 19, 2015 - admin

Chapter 7 – Taxation of specified tax-deferred accounts

These special tax-deferred accounts (think “IRAs”) are treated as if they are fully distributed to you on the day before expatriation.  No exemptions.  No exclusions.

Bad news.  But it is bad news for Covered Expatriates only.  Someone who is merely an Expatriate is not concerned with this.

Section 1.  What Are They?

The mark-to-market rule does not apply to everything. A few items are excluded. Among the excluded items are “specified tax deferred accounts.”

The mark-to-market rules do not apply to certain types of tax-deferred accounts. These are the IRAs and other statutorily-created tax-favored accounts found in the Code.

People who are not “Covered Expatriates” do not experience this “make believe” distribution and acceleration of the time of taxation of the IRA.... continue reading

November 19, 2015 - admin

Chapter 6 – Mark-to-market taxation

This chapter applies to Covered Expatriates only.

Except for three categories of assets, pretend that you sold everything that you own on the day before you expatriated.  Apply an exclusion to prevent tax on the first $668,000 of gain, and pay tax on the rest.

Section 1.  Assets Marked-To-Market

The exit tax applies to everything a Covered Expatriate owns. The method of calculating tax, however, differs depending on the asset involved. The mark-to-market rules apply to all property of a Covered Expatriate except:

  • Any “deferred compensation item;”
  • Any “specified tax deferred account;” and
  • Any interest in a non-grantor trust.

The exit tax rules for the three exceptions are dealt with in future chapters.... continue reading