January 15, 2021
Farewell USA, Hello Exit Tax! Considerations and Tax Planning for Relinquishing a green card or US citizenship
If you are planning to leave the US, future taxes might be the last thing on your mind!
To help illustrate what departing the US might look like for you, we analyzed what happened when the co-founder of a hi-tech company in Silicon Valley relinquished his US citizenship.
The Situation
The co-founder’s decision to forgo his citizenship was severely criticized, but what did he lose and gain during this process and what might you? On the bright side, he saved an estimated $700 million in various taxes, including capital gains tax that would have been assessed in future years. On a less positive note, he was required to give up his lawful and permanent US residency, and pay significant exit tax.
Exit Taxes
The complexity surrounding exit tax (also known as expatriation tax) along with corresponding tax filings can deter some taxpayers from even surrendering their US green cards or US citizenship at all.
Section 877A stipulates that all property will be deemed as sold at its fair market value (FMV) on the day before the expatriation or residency termination date. This is required for certain U.S. citizens who relinquish citizenship and green card holders who renounce their status and leave the U.S. after being a holder for 8 or more of the last 15 years.
An exit tax will be assessed if an individual meets one of the following requirements:
1. Average annual U.S. income tax liability of at least $171,000 (as of 2020, adjusted for inflation in future years) over the last 5 years.
2. Net worth of at least $2 million.
3. Failure to certify on IRS Form 8854 that all U.S. tax obligations for the last 5 years have been resolved.
Exit Tax is assessed at 23.8% on net gains from deemed sales, to the extent it exceeds $737,000. Once the exit tax is assessed, the US can no longer pursue the individual for taxes in subsequent years.
Deferral of taxes
For those who have liquidity issues or just prefer to defer US taxes on the deemed sale until the property is sold, a deferral request can be filed with the IRS. The deadline for the request filling is the due date of the return (plus extensions) for the expatriation year. However, this tax deferral will trigger a need to file taxes in the year of sale.
Conclusion
The decision to relinquish one’s United States citizenship or green card can be complicated and even stressful. An individual should carefully consider all possible ramifications and the permanency of the decision.
The tax professionals at Global Mobility Tax can help inform your decision by estimating your Exit Tax and providing step-by-step recommendations. We are happy to discuss questions you have about relinquishing your Green Card or US Citizenship. Contact us at info@GlomoTax.com.
Amanda Pope, CPA
Amanda is an Associate Manager and joined Global Mobility Tax in 2013. She has worked in public accounting since 2006 and started specializing in expatriate and inpatriate taxation during 2007. Amanda’s interest in international tax began when she lived abroad in London, South Africa, and Namibia. Her favorite part about her role is the personal aspect of communicating and advising clients while providing practical cross-border tax solutions.
She has a bachelor’s degree in Accountancy and a Master’s of Accountancy in Taxation from Brigham Young University. She is a Certified Public Accountant.
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