Case Study Tax Examples of Giving US Citizenship or Green Card

Case Study Tax Examples of Giving US Citizenship or Green Card

Tax Examples of Giving US Citizenship or Green Card 

When a US Person either renounces their US citizenship or relinquishes their Green Card as a Long-Term Lawful Permanent Resident, there are various tax implications to be aware of. But, just because two different taxpayers may have similar financial net worth, does not mean that they will have similar exit tax situations.  Many taxpayers are (understandably) confused about expatriation and that the exit tax is not technically a wealth tax per se. In other words, just because a person renounces or relinquishes their US person status –– even if they are a very high net worth taxpayer — does not mean they will necessarily owe any extra tax to Uncle Sam. Since the Internal Revenue Service’s information for this area of tax law is not very clear, we want to briefly provide a few case study examples to help illustrate the concept:

High-Net Worth, No Exit Tax Case Study 1

David is a US citizen who is worth $10 million. He has dual citizenship and has decided that he is going to renounce his US citizenship. All of David’s $10 million is held in cash. Therefore, at the time of expatriation, David will have no exit tax despite the fact that he is a covered expatriate.


That is because his assets are all in cash, which has the same basis as it does FMV, so there is no gain. Likewise, since David does not have any ineligible deferred compensation or specified tax-deferred accounts, there are no other exit tax consequences at the time of expatriation.

High-Net Worth, Exit Tax Case Study 2

Michelle is also a US citizen who is worth $10 million. But unlike David, she has $1 million in cash and $9 million in stock. She only has a $2 million basis in that stock, which means that there is a $7 million “phantom gain” on the day before expatriation. Since the exclusion amount is only around $750,000, that means at the time of exit, Michelle will have a significant tax liability due to the total mark-to-market gains she has on the difference between her adjusted basis and the fair market value on the day before expatriation.

High-Dollar 401K, No Exit Tax Case Study 3

Peter has all of his US net worth in 401(k), which he has been maxing out for several years and is now worth $6 million. Since the 401(k) is an eligible deferred compensation plan, the value of the 401(k) is included as part of the analysis to determine whether or not Peter meets the threshold requirements for being a covered expatriate (he does), he is not required to gross up the 401(k) at the time of expatriation as part of the phantom income. Rather, further down the line when David starts receiving distributions, he’ll be stuck holding the bag on a 30% withholding rate —but that is an income tax based on FDAP and not an exit tax

High-Dollar Foreign Pension, Exit Tax Case Study 4

Jessica is a US citizen who has been working outside the United States for the better part of 25 years. She resides in a foreign country and has a foreign pension plan worth about $6 million, which is the bulk of her net worth. She earned all of this money while she was a US person so there is no issue would step-up basis. As a result, in accordance with the ineligible deferred compensation exit tax rules, Jessica will be required to gross up the value of her foreign pension and included it in her final tax return — even though she has not received any of that distribution and it is considered tax-exempt in the foreign country she resides and under the foreign country pension rules — similar to how a 401(k) receives tax-exempt status during the contribution/growth phase.

Exit Tax Analyses are Very Complicated

In general, exit tax consequences can be significant and the analysis complex. Therefore, if you are considering expatriation you may want to speak with the Board-Certified Tax Law Specialist that specializes in offshore tax and expatriation matters in order to get a general understanding of what you may be in for at the time of exit — and how to possibly be glad to minimize or reduce exit tax.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.

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