No Easy Exit: The U.S. Expatriation Tax

As US Citizenship gets increasingly expensive, more individuals and families are leaving the United States – many of them for good. However, there is no easy exit from the IRS and those considering expatriation are advised to obtain tax help before taking the plunge.

What is the Expatriation (Exit) Tax?

The Expatriation Tax (more commonly known as “Exit Tax”) can be found in 26 U.S. Code 877A. The income tax obligations of U.S. expatriates include, but are not limited to, the following:

  • All property belonging to the expatriate shall be treated as sold on the day before the expatriation date at its fair market value (“mark-to-market regime“).
  • All capital gains shall be paid during the year of expatriation, and all losses must be taken that year.
  • With few exceptions, deferred compensation is treated as if it was received on the day before the expatriation date.
  • Tax payments on hard to sell assets may be deferred if the expatriate posts collateral and pays interest until payment is made.
  • All payments from nongrantor trusts are subject to 30% withholding.

26 U.S. Code 2081 contains the estate and gift tax provisions of the Exit Tax, which imposes on U.S. citizens and residents a tax at the highest rate on gifts or bequests from expatriates – the receiver of the gift or bequest will therefore be paying the gift or estate tax rather than the giver, who will be outside the U.S. tax system. Note that deductions may be taken for gift and estate taxes paid to a foreign country with respect to such gifts.

Does the Exit Tax apply to me?

The Exit Tax applies to (a) U.S. citizens who terminate their citizenship and to (b) long term residents (Green Card holders for at least 8 of the last 15 years) who terminate their permanent resident status, when any of the following conditions are met by these individuals:

  • Have an average annual net income tax more than the following specified amounts, adjusted for inflation – $147,000 (2011), $151,000 (2012), $155,000 (2013) and $157,000 (2014);
  • Have a net worth of $2 million or more on the date of expatriation or termination of residency; or
  • Failed to comply with all their U.S. federal tax obligations for the 5 years preceding the date of expatriation or termination of residency.
    Different provisions apply to those who expatriated on or before June 16, 2008.

What if I return to the U.S.?

Expatriates who return to the U.S. for more than 30 days per year for the 10 years following expatriation are considered “U.S. residents” for that entire tax year, subjecting them again to a U.S. tax assessment on their worldwide (not just U.S.-source) income.

Determining whether you are subjected to the exit tax can be complicated, as there are different ways an individual can avoid the expatriate exit tax.   Given the foreseeable consequences of failing to properly compute an expatriation tax, we urge you to seek the advice and counsel of a tax attorney.   The dedicated and experienced tax lawyers at Moskowitz LLP have advised green cardholders and citizens on expatriate exit tax matters.   Please do not hesitate to contact us for more information.