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I have heard people say that,  if Donald Trump runs and wins in 2024, they will leave the country, but not many actually understand what leaving the U.S., and giving up U.S. citizenship, entails.  It can be done, and is easier since 2008 when the Hero’s Earnings Assistance and Relief (HEART) Act passed.  It is, however, an expensive process for those who have any significant amount of wealth, as the IRS wants to get it cut of the estate taxes that you would have otherwise have paid if you had remained a U.S. citizen or Resident.  Here is a brief summary.

Covered Expatriates

The law covers people who leave and are either 1) U.S. citizens or 2) long term permanent residents who have held green cards for eight of the last fifteen years and give up their green card.  Both are subject to an immediate “Exit Tax” on unrealized gains on their assets, both in the U.S. and worldwide, including grantor trusts and future gifts to U.S. citizens and residents.  You qualify as a covered expatriate if you meet any of the following criteria: 

  • You have a net worth of $2 million or more, including all property that is subject to a gift tax and all property you hold a right to use or benefit from.
  • You have an average income tax liability of more than $139,000 over the five years prior to leaving, indexed for inflation.
  • You fail to certify that you have complied with all U.S. Federal tax obligations for the preceding five years.

Exemption

People who are dual citizens from birth and who have not lived in the U.S. for more than 10 of the last 15 years, and people who are under the age of 18 and one-half and have not lived in the U.S. for the last 10 years, are exempt.

Mark-to-Market

The amount of the unrealized gains on assets to which the exit tax is applied is determined by the “mark-to-market” basis.  This means that the assets are valued as if they had been sold at Fair Market Value on the day before the exit event.  It includes any interest that would have been included in the gross estate for estate tax purposes. The first $600,000 of the calculated gains  is exempt ($713,000 adjusted for inflation to 2019). This exempt amount is allocated pro rata across all of the assets. Any gain over this amount is subject to U.S. income tax. The tax payment is due 90 days after giving up U.S. citizenship, and it is considered effective even if you do not file the Form 8854 Expatriation Information Statement 

Exception

The exceptions to the mark-to-market rule are a few certain deferred compensation items, specified tax-deferred accounts and non-grantor trusts (including offshore trusts). For the rest, such as IRA’s, tuition programs 529 accounts health savings accounts and so on, the entire amount is subject to immediate income tax.  Once paid, no further tax is due on withdrawals on those accounts. 

30% withholding on Retirement Plans

Deferred Compensation Plan assets are subject to a 30% withholding at the time of the event and are subject to a 30% withholding when the assets are3 paid out to a non-resident alien, resulting in up to a 51% tax on retirement accounts.

Future Gifts and Bequests

As a covered expatriate, if you make a gift in excess of $15,000 a year (in 2019) the recipient (including trusts) must withhold tax at the highest marginal rate for gift or estate tax in effect at that time, with no regular allowances as are allowed for U.S. persons for unified credits etc.  The gift is tax-exempt if to a U.S. Spouse or a US Public Charity. 

Procedure

To give up U.S. Citizenship you should:

  • Open a bank and investment account with a bank or investment firm that has no U.S. connections,
  • Get a citizenship in another country,
  • Leave the U.S.
  • Appear before a U.S. Consul in that country and renounce your U.S. Citizenship,
  • Transfer assets into the non-U.S. bank or investment company,
  • File Form 8854 Expatriation Information Sheet and
  • Pay the tax when due.  

Conclusion

Leaving the US and giving up your US citizenship is possible, but is complicated and costly.  For some people it may be a better option that waiting around until either Trump starts his second term or Elizabeth Warren enacts her 5% annual confiscation of private wealth. Either way, you should not do so without a great deal of planning.

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