US Exit Tax Planning | Leaving the US Permanently?
The decision to give up your US citizenship or green card is a big one. And it pays to be well informed. Whether you are considering this change for political, tax, or other reasons, it’s important to get your facts straight and do things in the right order.
That’s where we come in. We can help guide you through the process and sort out myth from reality. For example:
MYTH: I gave up my US citizenship or green card for immigration purposes, so I am no longer a US tax resident.
REALITY: Even if you have taken the proper immigration steps, there are additional steps needed to end your US tax residency. Until you do so, you remain a US tax resident. And you remain taxable each year on your worldwide income and subject to foreign asset reporting requirements.
MYTH: If I give up my citizenship (or long-term green card), I can avoid paying US taxes on my appreciated assets.
REALITY: The US has enacted an Exit Tax that prevents US citizens and green card holders from giving up their residency in order to avoid paying US taxes on accumulated wealth. It applies to individuals who meet certain thresholds for annual income net worth. The Exit Tax itself is computed as if you sold all of your worldwide assets on the day before you expatriated. Then, you are taxed on the gains.
MYTH: I don’t have a lot of assets, so I can’t be subject to the US Exit Tax.
REALITY: The Exit Tax also applies to anyone who hasn’t filed complete and accurate US tax returns for the 5 years preceding expatriation. Fortunately, to get ready for expatriation, you can file amended returns to fix your past filings.
How To Determine If You Will Owe Exit Tax
In our video, Exit Tax Part 1, we discuss how you can determine if you’ll owe an Exit Tax based on the IRS’s three-part test.
What To Do If You Will Owe an Exit Tax
Even if you suspect you may owe Exit Tax, there are some tax planning strategies to help reduce or eliminate the tax.
It’s also important that you take the right steps to terminate your US tax residency.
Watch our Exit Tax video Part 2, to understand how to calculate the Exit Tax, forms to file, and some considerations after you’ve gone through the Exit Tax.
The US Exit Tax calculation is not straightforward, especially when pensions are involved. Get professional tax help. We offer tax planning strategies to reduce or eliminate your tax liability. We can also guide you through the multiple steps in the Exit Tax return filing process.
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Frequently Asked Questions about the Exit Tax
This tax applies to those who meet any of these conditions:
- Your annual net income tax liability for the prior five years was greater than a specified amount, adjusted for inflation ($162,000 for 2017, $165,000 for 2018, and $168,000 for 2019), or
- Your net worth is $2 million or more (including the present value of any pension) on the date of your expatriation or termination of residency, or
- You fail to certify on Form 8854 that you have met US tax law requirements for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are considered a “covered expatriate” and are subject to the Exit Tax.
Yes, both US and foreign pensions and retirement accounts are included when calculating your net worth. Depending on the type of pension, they may not actually be taxed under the Exit Tax, but their value is used to determine whether you are subject to the tax. And often this is what puts people over the threshold for the Exit Tax!
The value of the pensions can be tricky to determine, especially when those pensions are “defined benefit” employer pensions. We often see these with individuals who have worked for the World Bank, IMF, and large established employers. The pension valuation calculations for Exit Tax are complex. They consider the type of pension, the net present value or “accrued benefit” of future distributions, the location of work while earning the pension, and other factors.
Yes, this is critical. To end your US tax residency, you must be able to certify on Form 8854 that your past 5 years’ worth of US tax returns have been filed and were complete and accurate. You certify this under penalties of perjury.
Yes, even if you are not a “covered expatriate” under the Exit Tax tests and don’t owe any Exit Tax, you must file Form 8854. The Form 8854 is required for US citizens as part of the filings to end their US tax residency. It is also required for long-term permanent residents who held their green card in at least 8 of the last 15 years. On this form, you show that you don’t meet the thresholds to be a covered expatriate. And you certify that your past 5 years’ worth of filings were complete and accurate.
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We’ve provided tax support to expatriating individuals for decades—both under old rules for expatriation and under the current regime, which has been in place since 2008.
We can help you with:
- Exit Tax planning
- Optimal timing to expatriate, to avoid or reduce your Exit Tax
- Tax treatment and valuation support for your pensions and other assets
- Tax projections for the year of expatriation, including tax impact of your “deemed sale” at expatriation
- Gifting and restructuring strategies, to bring your income or net worth below Exit Tax thresholds
- Options for amending prior tax returns to bring you back into compliance
- Tax planning to reduce any US income tax exposure after expatriation
- Tax planning to reduce any US estate tax exposure after expatriation
- Exit Tax calculations and return preparation
- Preparation of the U.S. tax return as a “dual status” taxpayer in the year of expatriation
- Preparation of Initial and Annual Expatriation Statement (Form 8854)
- Verification that you are fully compliant with US tax law for the prior 5 years
- Preparation of prior years’ amended returns and certifications, if needed
Need a referral to an experienced immigration attorney familiar with the Exit Tax? We work with many attorneys and can provide a reliable referral.
Why The Wolf Group?
Since 1983, we’ve worked with clients in the United States and abroad on international tax matters. We have a long history of “cleaning up” complex tax returns, reporting foreign assets, and reconstructing financial records.
Check out our extensive team of CPAs, all with vast international tax experience.
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