Calculating Net-Income Tax Liability at Expatriation
Net-Income Tax Liability & Covered Expatriate Status: If a person seeks to relinquish their U.S. tax status and files their tax returns married filing jointly (MFJ), the process becomes a bit more complex in accordance with the covered expatriate rules for net-income tax liability.
There are three (3) tests to determine if a person is a covered expatriate.
The second test involves “Net Income Tax Liability.”
As provided by the IRS:
You are a covered expatriate if you expatriated after June 16, 2008, and any of the following statements apply.
Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.
$139,000 for 2008.
$145,000 for 2009.
$145,000 for 2010.
$147,000 for 2011.
$151,000 for 2012.
$155,000 for 2013.
$157,000 for 2014.
$160,000 for 2015.
$161,000 for 2016.
$162,000 for 2017.
$165,000 for 2018.
$168,000 for 2019.
Working through the code sections:
IRC 877 (2) (A)“The average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000” (adjusts for inflation)
IRC 38 (c)(1)
“Limitation based on amount of tax
The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax over the greater of— (A)the tentative minimum tax for the taxable year, or
(B)25 percent of so much of the taxpayer’s net regular tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term “net income tax” means the sum of the regular tax liability and the tax imposed by section 55, reduced by the credits allowable under subparts A and B of this part, and the term “net regular tax liability” means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part.
For purposes of the preceding sentence, the term “net income tax” means the sum of the regular tax liability and the tax imposed by section 55, reduced by the credits allowable under subparts A and B of this part, and the term “net regular tax liability” means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part.”
The problem is that most married couples file their U.S. tax returns as Married Filing Jointly. But, the IRS does not expressly allow you to “split” the income tax liability for expatriation purposes.
In other words, if one spouse is going to expatriate but filed a Married Filing Joint Tax Return, then the Average Annual Net Income Tax Liability will be the amount contained in the jointly filed tax return – even when only one spouse is expatriating.
Filing Separate Returns
When one spouse is considering expatriation, this is where proper exit tax planning takes shape.
If a person is going to be considered a covered expatriate because of the net-worth test, then filing separate returns may not provide any help avoiding covered expatriate status.
But, if the net-income tax liability is the catalyst for being deemed a covered expatriate, then proper planning is crucial, and a Taxpayer may consider filing tax returns Married Filing Separate for 5-years.
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