Net Income Tax Liability & Expatriation
Net Income Tax Liability & Expatriation: In order to determine whether or not an expatriate is going to be deemed a covered expatriate, there are three (3) tests the expatriate has to consider before making a final determination. The first test is referred to as the average Net Income Tax Liability Test. With this test, the taxpayer must average the tax liability in the first five years prior to the year of expatriation to determine what the average net income tax liability is for those years. If after computing the tax liability, the taxpayer has a Net Income Tax Liability that exceeds the amount for that year, then the taxpayer is considered a covered expatriate.
“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.
$171,000 for 2020.”
Net Worth Under $2M
One common misconception when it comes to expatriation is that Exit Tax is based on net worth — but that is incorrect. The Net-Worth test is just one of the three different tests a taxpayer has to consider at the time of expatriation. In other words, even if a person has a net worth below $2,000,000, they may still be considered a Covered Expatriate and may still be subject to exit tax at the time they filed their Form 8854.
More than Just Mark-to-Market
Another common myth about expatriation is that only unrealized gain for certain stocks and other securities is what sets off the exit tax — but that is also incorrect. Even if a person does not own any stocks or other investments that have unrealized gains, they may still be subject to an exit tax if they have deemed distributions, tax deferred investments, or certain ownership in foreign trusts.
Net Income Tax Liability is Only One of the Covered Expatriate Tests
In conclusion, the Net Income Tax Liability test is just one of the three tests an expatriate will have to consider when it’s time to expatriate from the United States. Even if their Net Income Tax Liability falls below the five year average for the five years preceding the expatriation year, it is important to remember that this is only one of the three tests — and the taxpayer will also have to consider the net-worth test along with the tax compliance analysis.
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