The United States imposes an exit tax on individuals who relinquish their citizenship or long-term residency status. This tax can be a significant financial burden, but there are strategies that can be employed to minimize or avoid it altogether. This guide will provide a comprehensive overview of the exit tax, including who is subject to it, how it is calculated, and what steps can be taken to reduce its impact.
Who Is Subject to the Exit Tax?
The exit tax applies to two categories of individuals:
- U.S. citizens who renounce their citizenship
- Long-term residents (green card holders) who terminate their residency
Long-term residents are individuals who have held a green card for at least eight of the past 15 years.
How Is the Exit Tax Calculated?
The exit tax is calculated by applying a 30% tax rate to the following types of income:
- Specified tax-deferred accounts: This includes IRAs, 401(k)s, and other tax-advantaged retirement accounts.
- Eligible deferred compensation: This includes pensions and other deferred compensation plans where the payor is a U.S. person.
- Ineligible deferred compensation: This includes pensions and other deferred compensation plans where the payor is not a U.S. person.
- Beneficiaries of nongrantor trusts: U.S. beneficiaries of nongrantor trusts are subject to a 30% tax on distributions received from the trust.
In addition to the above, the exit tax also includes a mark-to-market rule, which deems all assets to be sold on the day before expatriation. Any capital gain recognized on these deemed sales is subject to the exit tax.
How to Avoid the Exit Tax
There are a number of strategies that can be employed to avoid or minimize the exit tax. These strategies include:
- Avoiding expatriate status: For green card holders, the most effective way to avoid the exit tax is to avoid becoming a long-term resident. This can be done by leaving the United States and abandoning the green card before the eighth year of residency.
- Avoiding covered expatriate status: If expatriation is unavoidable, the next step is to avoid becoming a “covered expatriate.” Covered expatriates are subject to the full force of the exit tax, while non-covered expatriates are only subject to the paperwork requirements. There are three tests that determine whether an individual is a covered expatriate:
- Net worth test: Individuals with a net worth of $2 million or more on the date of expatriation are considered covered expatriates.
- Net tax liability test: Individuals with an average annual net income tax liability of $162,000 or more for the five years preceding expatriation are considered covered expatriates.
- Certification test: Individuals who fail to certify that they have been in full compliance with U.S. tax laws for the five years preceding expatriation are considered covered expatriates.
- Minimizing capital gain: If covered expatriate status is unavoidable, the next step is to minimize the amount of capital gain that will be subject to the exit tax. This can be done by holding assets that are not subject to capital gains tax, such as cash or bonds.
The exit tax can be a significant financial burden for expatriates, but there are strategies that can be employed to minimize or avoid it altogether. By carefully planning and executing an exit strategy, expatriates can protect their assets and reduce their tax liability.
Frequently Asked Questions
Q: Who is subject to the exit tax?
A: The exit tax applies to U.S. citizens who renounce their citizenship and long-term residents (green card holders) who terminate their residency.
Q: How is the exit tax calculated?
A: The exit tax is calculated by applying a 30% tax rate to specified tax-deferred accounts, eligible deferred compensation, ineligible deferred compensation, and distributions from nongrantor trusts. The exit tax also includes a mark-to-market rule, which deems all assets to be sold on the day before expatriation. Any capital gain recognized on these deemed sales is subject to the exit tax.
Q: How can I avoid the exit tax?
A: There are a number of strategies that can be employed to avoid or minimize the exit tax. These strategies include avoiding expatriate status, avoiding covered expatriate status, and minimizing capital gain.
Q: What is the difference between a covered expatriate and a non-covered expatriate?
A: Covered expatriates are subject to the full force of the exit tax, while non-covered expatriates are only subject to the paperwork requirements. There are three tests that determine whether an individual is a covered expatriate: the net worth test, the net tax liability test, and the certification test.
Q: How can I minimize the exit tax if I am a covered expatriate?
A: If you are a covered expatriate, you can minimize the exit tax by holding assets that are not subject to capital gains tax, such as cash or bonds. You can also consider gifting assets to your spouse or other family members before expatriating.
US Exit Tax: How to Avoid it When Renouncing US Citizenship (Renounce US Citizenship)
FAQ
Do I have to pay US exit tax?
Who is subject to US exit tax?
What triggers exit tax?
Do green card holders have to pay exit tax?
Do you have to pay exit tax if you leave the country?
Not everybody who leaves the country has to pay an exit tax — only those citizens and long-term resident Green Card holders who the IRS says fall in the category of covered expatriates. To be considered a covered expatriate, you must meet one of the below standards: You have a personal net worth of over $2 million at the date of expatriation.
Who is subject to the exit tax?
The exit tax applies primarily to “covered expatriates,” a category that includes people who meet certain thresholds regarding their net worth, taxable income, and tax compliance. If you do not fall under the covered expatriate definition, you will not be subject to the exit tax.
Does exit tax apply to non-citizens?
Exit tax only applies to built-in gains on worldwide assets, and the first $737,000 of the gain is excluded. For U.S. citizens, adjusted basis is determined by adding the purchase cost and any permitted basis adjustments. While this is also true for noncitizens in ordinary circumstances, in the context of the Exit Tax, it is different.
Are all expatriates subject to US exit tax?
Not all expatriates are subject to the US exit tax. Only those who are considered covered expatriates must pay an exit tax on their assets when they choose to leave the US permanently. An individual is considered a covered expatriate if they meet any of the following three criteria: