What Tax Issues Need to Be Addressed Upon Expatriation From the U.S.?

 Posted on December 17, 2020 in Taxation Law

People who live in the United States are required to pay a variety of different types of taxes. Because the U.S. Tax Code is so complex, taxpayers are not always aware of issues that may affect the taxes they pay, and they may encounter situations that trigger unexpected tax obligations. In addition to paying taxes while residing in the United States, taxpayers will also need to meet certain requirements when moving to other countries.

U.S. citizens who plan to relinquish their citizenship or permanent residency “Green Card” holders who will no longer be lawful permanent residents of the United States will need to follow expatriation procedures with the IRS. In some cases, an exit tax may apply, or a person may face a tax audit based on his or her compliance with tax obligations in previous years. By working with a tax law attorney, these individuals can understand their obligations and take steps to minimize penalties and avoid ongoing tax issues.

Preparing for Expatriation

All expatriates are required to file Form 8854 for the year in which they terminated their citizenship or ended their residency in the United States. This form certifies that a taxpayer has complied with tax obligations in the 5 years prior to expatriation. Expatriates who defer tax payments or compensation or who have an interest in nongrantor trusts will need to file Form 8854 annually.

“Covered expatriates” will be required to pay an exit tax upon expatriation. A person is considered a covered expatriate if one of the following conditions apply:

• The average net income tax they paid in the previous 5 years was above a certain threshold. In 2020, this threshold is $171,000.
• Their net worth on the date of expatriation is $2 million or more.
• They did not certify compliance with tax obligations in the previous 5 years either through failure to file Form 8854 or because this form did not show that they met their tax requirements.

The expatriation tax is a mark-to-market tax, meaning that most of the assets owned by an expatriate are considered to be sold on the day before the date of expatriation. Taxes will apply to any gains that are above a certain amount. This amount is adjusted each year, and in 2020, net gains of more than $737,000 will be subject to taxes.

Payment of mark-to-market taxes can be deferred on a property-by-property basis. Deferred taxes will be due in the tax year when property is sold, transferred, or otherwise disposed of. Interest will apply to the deferred amount, and taxpayers will be required to provide a bond or other form of security, and they must waive any rights under another country’s laws or an international treaty that would preclude the collection of these taxes.

Contact a San Jose Tax Lawyer

If you are planning to expatriate, you will want to take the right steps to minimize your tax liabilities and avoid potential penalties. At John D. Teter Law Offices, we can help you understand the most advantageous tax strategy, and we can provide representation if the IRS performs a tax audit. To learn more about how we can help you address your tax issues, contact our San Jose, CA tax law attorney at 408-866-1810.

Sources:

https://www.irs.gov/individuals/international-taxpayers/expatriation-tax

https://www.irs.gov/instructions/i8854