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Giving up U.S. Citizenship or Terminating Long-Term Residency

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Rödl & Partner Tax Matters Vol 2016 – 9, published in June 2016

 

A U.S. citizen who gives up U.S. citizenship or a long-term U.S. resident who gives up his or her residency status and who is a covered expatriate is subject to a mark-to-market rule. Under this rule, his or her property is deemed to be sold on the day before the expatriation, and he or she is taxed on the gain in excess of an inflation adjusted amount of $680,000 for 2014.

 

A covered expatriate is any U.S. citizen who relinquishes citizenship or any long-term U.S. resident who ceases to be a lawful permanent resident of the U.S who meets one of the following tests:

  1. The individual's average annual net income tax for the period of 5 tax years ending before the date U.S. citizenship or residency is lost is greater than an inflation adjusted amount that is $160,000 for 2015,
  2. The net worth of the individual as of the date U.S. citizenship or residency is lost is $2,000,000 or more, or
  3. The individual fails to certify under penalty of perjury that he has met the requirements of the U.S. tax code for the 5 preceding tax years or fails to submit whatever evidence of his compliance that the IRS requires.

All the property of a covered expatriate is treated as sold for its fair market value on the day before the expatriation date. Any gain on the deemed sale is recognized notwithstanding any other non-recognition rules and is taken into account for the tax year of the deemed sale. However, losses may not be recognized if they would otherwise not be recognized. The basis of the assets will be adjusted by the amount of gain or loss taken into account.

 

A covered expatriate may make an election to defer the payment of tax attributable to any property that is deemed sold under the mark-to-market rule. Any tax deferred under this election bears interest from the due date of the taxpayer's return for the expatriation year and is permitted only if the expatriate provides adequate security.

 

Deferred compensation items of a covered expatriate are subject to special rules. Eligible deferred compensation is subject to 30% withholding.

 

The present value of ineligible deferred compensation is treated as a distribution received by the covered expatriate on the day before the expatriation date. In addition, deferred compensation items that would otherwise not be taken into account under Code Sec. 83 will be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date.

 

For individuals who expatriated after June 3, 2004 and before June 17, 2008, the above rules do not apply. Instead Code Sec. 877 applies, under which individuals who meet certain monetary thresholds are subject to regular U.S. income tax on their worldwide income for ten years following the date of expatriation.

 

The expatriation rules are complicated, and the above discussion is a short summary of those rules. If you have questions about your U.S. tax obligations as an expatriate, or if you are considering giving up your U.S. citizenship or terminating your U.S. long-term residency status , please contact us for assistance before making a decision.

 

 

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

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Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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