- 1 Important Considerations Before Expatriating
- 2 Do You have Second Citizenship Already?
- 3 Investment Visa: CBI v RBI
- 4 Tax Planning Around Covered Expatriate Status
- 5 Exit Tax is More than Mark-to-Market
- 6 Exit Tax It is Not a Wealth Tax
- 7 The Expatriation Process is Complex
- 8 Golding & Golding: About Our International Tax Law Firm
Important Considerations Before Expatriating
5 important Considerations Before Expatriating from US: Expatriation is the formal process of relinquishing Long Term Lawful Permanent Resident status or renouncing US Citizenship. Therefore, if the US Person is merely a visa holder or a non -long-Term LPR, then when they exit the United states, it is not considered expatriation per se — and they are spared having to prepare an exit tax analysis — although they may be required to complete a sailing permit from the IRS along with a few lesser intensive hurdles to jump on through on their way out of the US. For many expatriates — especially those who have dual-citizenship and family or business operations abroad — expatriation is a wonderful opportunity to cut tax ties with the United States (they can always return on temporary visa or a temporary Green Card). But, sometimes, expatriation sounds better in the brochure — especially for Taxpayers who only recently came into wealth and are only concerned about having to pay tax on the money. While the latter situation is completely understandable, it is important to assess the following five considerations before taking the plunge and formerly expatriating from the United States.
Do You have Second Citizenship Already?
In order to expatriate from the United States, a person must already have citizenship in another country. When a person is an LTR, it is not a big problem since they are already a Citizen of another country. But, when a person is a U.S. citizen, it is important that they obtain citizenship — if they have not done so already — before expatriating, because the US government will typically not approve expatriation for someone who will be left orphaned (e.g., no citizenship in any country).
Investment Visa: CBI v RBI
it is not uncommon for taxpayers to approach our firm and tell us that they are U.S. Citizen and want to expatriate and are seeking a Portugal Golden Visa and then take the plunge. When it comes to golden visa programs, there are two types: Residence-by-Investment (RBI) and Citizenship-by-Investment (CBI). With Citizenship-by-Investment — take St Kitts and Nevis for example — a person is able to obtain citizenship — and thus a passport — through investment. With Residence-by-Investment such as Portugal — it does not provide a passport at the outset, because the person is not a citizen of Portugal simply by obtaining a Portugal Golden Visa. therefore, it is important to understand the different golden visa programs and how they operate before planning your exit.
Tax Planning Around Covered Expatriate Status
When a person is a covered expatriate, then they may become subject to the exit tax — depending on the cross-section of their assets, mark-to-market (imaginary) gain on the SALE, deemed distributions on items such as foreign pension, etc. Once a person performs the expatriating act, they cannot go back and unwind it and conduct the tax planning post-expatriation. Therefore, it is important for the taxpayer to consider exit tax and how to plan around it before formally expatriating.
Exit Tax is More than Mark-to-Market
Sometimes taxpayers are under the misimpression that the only items to consider for the Exit Tax are items with built in capital gains — but that would be too easy for the IRS. Beyond mark-to-market gains, there are other potential tax consequences at exit, such as deemed distributions for ineligible deferred compensation (foreign pension), deemed distributions on certain deferred tax investments such as IRAs — along with other potential tax pitfalls and landmines that could lead to significant exit tax — even if there is no mark-to-market gain.
Exit Tax It is Not a Wealth Tax
Being a Covered Expatriate and actually owing exit tax are two different things.
For example, let’s take Simon and Michelle. Each one of them is worth $10 million.
Simon has $1,000,000 basis in stock that is now worth $10 million; therefore, he may become subject to an exit tax, which is the idea that Simon is going to pay a phantom tax on the perceived gain on the built-in gain that would have happened on the day before he expatriated using the Fair Market Value of the stock and subtracting the basis.
Conversely, Michelle has $10 million in cash — and therefore would not be subject to any exit tax.
Because there is no gain on cash — and since it is not pension or other type of deferred investments — there is no exit tax on merely holding cash.
The Expatriation Process is Complex
It is important to understand potential tax implications of being an expatriate before performing the expatriating act and something taxpayers should consider early in the planning process.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.