How Expatriate Investments are Taxed at Exit
How Expatriate Investments are Taxed at Exit: 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 review how expatriate investments are taxed at exit from US:
Examples of How Expatriate Investments are Taxed
Here are some common assets and investments, and how exit tax works.
Is there Exit Tax for Cash?
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 and Expatriation Tax Rules
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.
Property Sales and FMV at Exit from the US
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)
How are Tax Deferred Investments Treated at Expatriation
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 & Exit Tax
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.?
Our firm specializes exclusively in international tax, expatriation, and specifically how expatriate investments are taxed by the US at expatriation.
Contact our firm today for assistance with getting compliant.