It’s not every day that the words “Expatriate Tax” cross your path. Generally speaking, it’s not the most common of tax situations even if you’re a tax preparer. If you already know what expatriation taxes are, you may already be an expatriate yourself, and you most likely understand the complicated rules already. If this is your first venture into these unknown waters, allow me to explain just what expatriate tax is all about.
Expatriation taxes are provisions that apply to US citizens who have renounced their citizenship, or long term residency status with the United States for Federal tax purposes. There are several reasons a person may be interested in moving out of the country and leaving behind their citizenship. Perhaps you’re interested in a new venture overseas, or maybe after a lifetime of living the American Dream, you’re ready to head home to your roots. Regardless the reason why, the United States has put in expatriation tax provisions to ensure that its citizens aren’t attempting to leave their citizenship behind to evade income or estate taxes. Before the introduction of expatriate tax laws there were numerous accounts of wealthy individuals making their money and leaving the country. There was no restriction and no ongoing tax to ensure that their money stayed within the country, and that its earners paid their dues. There are however exemptions to these rules. At one point in history (before 2004) you could apply through the IRS to prove that you weren’t trying to leave the country due to tax evasion reasons, and you’d therefore be exempt from paying these expatriate taxes. They switched that regulation to a monetary stipulation in 2004. The AJCA (The American Jobs Creation Act) amended IRC section 877, which allows for an alternative tax setup for some expatriated individuals. This amendment stated that you had to have had an average annual net income tax of $124,000 for 5 years preceding expatriation, or a net worth of $2 million or more on the date you expatriated in order to be required to pay up. That amount has changed after 2004, and just because you fell under those dollar amounts doesn’t exempt you entirely. You may still be required to pay expatriated taxes under other circumstances. As always, if you need some assistance or are having any issues whatsoever understanding the IRS rules here, we advise you to find a tax professional for expatriate tax to get you squared away.
The first expatriate tax provisions were initiated in 1966, but at that time, it was usually pretty obvious whether you were attempting to renounce due to tax evasion reasons or not. It was easily surpassed if you could prove you were leaving your citizenship behind for other reasons. In 1994 a Forbes story was put out highlighting multiple extremely wealthy entrepreneurs and business people who’d fled the country to evade paying their fair share of Uncle Sam’s money. It was at that point that the regulations surrounding expatriate taxes became even tighter. The US is unique in that it considers your worldwide income, taxable. That means that as long as you are a citizen and spend more than 30 days in the US in any given tax year, you’re required to pay taxes on the money you make anywhere in the world. Citizenship laws are tricky, too, so acquiring the services of an experienced accountant might be in your best interest. Green card holders and long term residents don’t carry the same regulations as citizens, so make sure you don’t get the three mixed up.
Another kind of taxation that is related to expatriate taxation, is the expat tax. If you’ve decided to maintain your residency status with the US, or want to remain a citizen but you’ve chosen to work and travel abroad. Expat taxes apply specifically to those people who earn an income outside the US. You’re still required to file a return no matter where you are (remember that whole “Worldwide Income” bit?), and even if you’re paying taxes in the country you’re earning your income in, you must file with the US too. In case you were wondering, there are only two nations in the world that charge their citizens an expat tax, the United States and a small African nation called Eritrea!
Yet another unfortunate add on to expatriate taxation is the exit tax. If you chose to expatriate on or after June 7, 2008, the US government deems all of your personal property to have been sold at a fair market value the day before you leave. All of that is now subject to taxation at the capital gains rate. There are, as always, exemptions to this rule. For example, if your assets don’t add up to a specific amount, you don’t have to pay the tax. You’re also allowed to defer the exit tax. In the event you are unable to actually sell all of your assets before your exportation, you can defer the cost of the tax for the time when you actually sell the property. You’re probably going to want to utilize the services of a tax preparer to help you in this situation, as it is convoluted and there is a lot of red tape!
If you’re looking for more answers or are interested in renouncing your citizenship or residency status for federal taxation purposes, please don’t hesitate to call. We’re here to help walk you through the complicated scenario that is expatriate taxation! Give me a call at (609) 936-9336, or if you’re in the neighborhood, stop by 1 N Rd #15d, Princeton, NJ 08540 to make an appointment in person. Let me help you hash out the details!
Joseph J. Gormley CPA