Mark-to-Market Expatriation Tax
Expatriation & Mark-to Market for Unrealized Gains: The Basics of the Expatriation Market-to Market Regime is complex. It involves computing the exit tax and determining if the covered expatriate has any IRS tax liability at when they exit the U.S.
First a person expatriates from the United States, and they are a U.S. Citizen or Long-Term Legal Permanent Resident — they have to complete the covered expatriate analysis.
Then, if the expatriate meets one of the three tests for becoming an expatriate – and do not meet one of the exceptions – they have to compute a Mark-to-Market calculation for unrealized gain.
But, what does Mark-to-Market mean?
Expatriation Market-to Market
A Covered Expatriate is a former U.S. Citizen or Long-Term Legal Permanent Resident who may become subject to exit tax. For the majority of assets, the expatriate will calculate the unrealized gain on assets owned by the covered expatriate.
Which date is used for the Expatriation Mark-to Market Regime?
The most important date in the mark-to-market regime is the date before expatriation. That is the benchmark to use when determining the unrealized gain.
How does the Market-to Market Regime Analysis Work?
Here is a typical analysis we handle using a single, publicly traded stock for example purposes. Let’s say David has ownership of 100 shares of a single stock. This is the only or securities portion of his portfolio.
*In real life, it is never that easy, but this example is for illustrative purposes only.
**We are intentionally not using assets that may have been purchased before the expatriate had U.S. status, because that will impact the basis. Likewise, it does not include tax deferred or deferred compensation.
David is a U.S. citizen who expatriated on December 29, 2019. The value of his assets were $9M, of which $5M qualify for mark-to-market treatment.
One of the items, is stock X.
- On 10/1/1998 1000 Shares of Stock X was purchased for $100 a share.
- The value is $100,000
- On 12/28/2019, the fair market value of the Stock X was purchased on 10/1/1998 is $2000 a share.
- The value is $2,000,000
The 12/28/2019 is the “day before expatriation” date. On 12/29/2019 David visited the consulate and renounced his U.S. citizenship.
When computing part C of the 8854, the expatriate (David) will have to include the gain $1,900,00 as part of his exit tax. The 877A exclusion amount is allocated over all of his assets, proportionately.
Not all Assets are Mark-to-Market
For example, cash is not a mark-to-market asset, so the computation is not used for cash. In addition, deferred compensation (401K for example) and deferred tax account (non-employment IRA) are not computed using mark-to-market.
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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?
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- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
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- Dually Licensed as an EA (Enrolled Agent) or CPA
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