Deemed Distribution Exit Tax
Deemed Distribution & Exit Tax at Expatriation: The deemed distribution & exit tax at expatriation analysis is complicated. The reason is primarily because when people consider IRS tax and expatriation, they focus on mark-to-market. But, in addition to mark-to-market, there is another aspect of exit tax which is referred to as a deemed distribution. With deemed distribution, a person is “deemed” to have received a full distribution of the money on the day before expatriation.
While this does not mean that the distribution is actually distributed out of the account, it does mean the income is deemed received by the covered expatriate.
Expatriation Deemed Distribution Example
Let’s take a look at a basic example with a common issue involving how a deemed distribution works with an ineligible foreign retirement plan.
David is a Green Card Holder and has been for 30 years.
Therefore, he is considered a Long-Term Resident and will file a Form 8854.
He has been working for a foreign employer who has been funding his foreign retirement since becoming a U.S. person. (aka there is no issue with pre-U.S. person basis). He was unaware that he was required to pay income tax on the portion being set aside for retirement.
David had a net-worth of $5 Million.
Therefore, David is considered a Covered Expatriate.
Computing the Exit Tax
David was smart, and handled his exit tax planning timely.
Therefore, David planned for his expatriation and therefore, he is all cash. As such, he does not have any mark-to-market issues. That does NOT mean he will escape U.S. exit tax, because David has a foreign ineligible deferred compensation plan.
Unlike a 401K which can escape deemed distribution, a foreign retirement account is deemed distributed on the day before the expatriation.
David’s foreign retirement is worth $900,000, and he has not tax basis in it (since it is all pre-taxed dollars).
Therefore, David is deemed to have received the full amount of the retirement on the day before expatriation. Since it is a foreign retirement plan with a foreign plan administrator, it would not qualify as an eligible plan.
*Eligible deferred compensation plans, such as a 401K can escape deemed distribution rules, presuming the proper procedures (Such as filing the W-8CE timely) – but all [potential] future treaty benefits at the time when income is distributed are waived.
Interested in Expatriation from the U.S.?
Our firm specializes exclusively in international tax.
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.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Our lead attorney is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
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
Interested in Learning More about our Firm?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
We specialize in FBAR and FATCA. Contact our firm today for assistance with getting compliant.
