Leaving the US? Here's What You Should Know

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People have been expatriating the US in record numbers in 2013; is this a fad, a trend or a bad idea? Jeff Eischeid, who specializes in estate tax planning, tax planning and personal financial planning, helps shine some light on the ins and outs of renouncing US Citizenship.

penalties associated with the failure to report information

There have been many recent articles indicating a large number of U.S. citizens are renouncing their U.S. citizenship in favor of establishing domicile in another country. According to an article published November 13, 2013 on CNBC.com, “expatriations reached a record high of 2,369 for the year (2013).” In some cases this expatriation is tax motivated, but in more and more cases it is driven by a desire to avoid the high cost of compliance and the punitive cost of penalties for an inadvertent failure in information reporting.

Take for example a U.S. citizen (Joe) living abroad who owns more than 50% of 10 foreign corporations, and, as part of his estate planning, Joe has established several grantor trusts for his children. Ignoring any income tax benefits or costs associated with living abroad, Joe has several U.S. filing obligations related to his foreign corporation ownership and his foreign trusts. He is required to file a Form 5471 for each foreign corporation or face a penalty of $10,000 per year per return. He faces further penalties associated with the failure to report information on Forms 3520 and 3520-A regarding the foreign trusts. The failure to report ownership of a foreign bank account on Form TD F 90-22.1 provides another layer of complexity and the potential for additional penalties and fines.

In 2008 Congress passed Section 877A imposing an “exit” tax on U.S. citizens leaving the U.S. This tax is imposed on any U.S. citizen or resident who relinquishes his U.S. citizenship (or green card in the case of a long term resident) and meets one of the following criteria:

  • Average annual net income exceeded $147,000 for the five years preceding the date of giving up his citizenship
  • His net worth is more than $2 million
  • Fails to make one or more certifications under penalties of perjury that he has complied with the rules of section 877A.

The exit tax is based upon a hypothetical sale of assets for fair market value on the expatriation date. Tax rates are applied in accordance with the normal application of the Code, i.e., capital gains tax rates are applied to gains that would be treated as capital under the Code. Some assets are excluded such as some deferred compensation amounts, IRA’s and interests in non-grantor trusts. These items are subject to tax outside of the hypothetical sale transaction under other provisions of section 877A.

Once the gain has been determined, 877A provides for a special exclusion amount. For calendar year 2013 the exclusion amount is $663,000, which is adjusted annually for inflation. This exclusion amount is applied pro rata to all gains subject to 877A. This provision leads to some planning opportunities such as selling low-tax gain assets separately in an earlier transaction to allow for the offset of the exclusion against gain on high-tax assets on expatriation. The expatriating taxpayer receives a step up in the basis of his assets to fair market value.

The payment of this exit tax may be deferred if the expatriate elects to defer payment, provides adequate security and makes annual information reporting until the deferred tax is paid. The deferral period could be the earlier of the sale of the asset, death of the expatriate or the date on which the required security fails to meet statutory requirements.

Deciding to relinquish your U.S. citizenship is a complex decision and not to be taken likely. Proper planning can reduce the cost of leaving the U.S. and impact your ability to visit the U.S. In all cases you should consult with tax and legal advisors who are knowledgeable in these areas.

About the Author:
Jeff Eischeid is a CPA with areas of expertise in estate tax planning, income tax planning and personal financial planning. Jeffrey Eischeid attained his BBA degree and his Masters of Accountancy degree from UGA. He became a Georgia Certified Public Accountant (CPA) in 1983 and has since earned the American Institute of Certified Public Accountants (AICPA) Personal Financial Specialist designation. Jeff Eischeid is an avid writer and lecturer who is active in the community. To find out more about Jeff Eischeid visit his website @ http://www.Jeff-Eischeid.com.

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