Exit Tax on Investments
Exit Tax on Investments: When a person gets ready to leave the U.S. and relinquish their U.S. status they may have to the pay the IRS an exit tax. Not all expatriates will have to pay the tax. Rather, it is only when the person:
- Is either a U.S. Citizen or Long-Term Resident
- Qualifies as Covered Expatriate; and
- Has Mark-to-Market gain (and insufficient exclusion available to reduce the gain to zero); or
- Is Subject to deemed distributions
For most clients, the main concern will be the exit tax on investments.
Therefore, let’s focus on some of the more common investments and assets.
Examples of Common Investments & Exit Tax
Here are some common assets and investments, and how exit tax works.
Cash is king.
When a person has cash available it does not impact the exit tax calculation per se.
In other words, while the cash may be what causes the expatriate to be come a covered expatriate ($2M Net-Worth Test), there is no deemed sale on the cash that would result in a mark-to-market capital gain.
Stock is a key component to the mark-to-market analysis.
For example, if Scott (a U.S. Citizen) purchased 100 shares of Stock X on 6/1/2004 (Scott was a U.S. Person on this date) for $20 share, and now (the day before expatriation) the shares are worth $9000 a share, then Scott will have to include this investment in the exit tax calculation.
With Property, there are some exceptions, exclusions and limitations.
In the common example, if Maria purchased her home in San Jose 20 years ago for $900,000 and now it is worth $3,100,000 — that will result in a large mark-to-market gain.
Maria may be able to reduce the gain if it is her primary residence.
*If she is a covered expatriate and owns US Property, it may be an issue later involving if she sells is (FIRPTA) and if she transfers it to a U.S person (2801 and USRPI rules)
Tax Deferred Investments
With tax Deferred investments, like an IRA (subject to some employment IRAs), the day before expatriation value is deemed distributed and grossed-up on their tax return.
Deferred compensation will depend on whether the compensation is eligible (401K) or ineligible (most foreign pensions)
- Eligible Deferred Compensation: The fund will be distributed when the person meets the proper age to receive distributions and begins taking distributions. They will be taxed at 30% and irrevocably waive treaty benefits at the time of expatriation;
- Ineligible Deferred Compensation the day before expatriation value is deemed distributed and grossed-up on their tax return.
Interested in Expatriation from the U.S.?
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We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
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Recent Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
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No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
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