What is Expatriation?
Being a Covered Expat: Tests and Exceptions
Calculating the Exit Tax for Covered Expats
If you are a covered expat, you will be subject to an exit tax on your worldwide assets. The exit tax is a tax on the unrealised gain in your assets as if you had sold them on the day before expatriation. The tax is calculated based on the fair market value of your assets on that day.
The tax rate is currently 30% on the net unrealised gain. There is a $821,000 exclusion amount, meaning the first $821,000 of gain is excluded from the tax. The exclusion amount is adjusted for inflation.
Exit Tax on Deferred Compensation Plans
If you have deferred compensation plans, such as a 401(k) or IRA, you will also be subject to an exit tax. The tax is based on the present value of the deferred compensation plans as of the day before expatriation. The tax rate is currently 30%.
Scope of Worldwide Property for Net Worth Test and Exit Tax
When computing the net worth test and the exit tax, worldwide property’s scope includes all tangible or intangible assets wherever located. This includes:
- Real estate
- Bank accounts
- Investments
- Intellectual property
It is important to consider this when deciding whether to expatriate.
Transfer Taxes on Gifts/Bequests from “Covered Expats”
If you are a covered expat, your gifts and bequests to U.S. persons will be subject to transfer taxes, including gift tax and estate tax. The transfer taxes are imposed on the fair market value of the gift or bequest, and the tax rates are up to 40%. There are some exceptions and exclusions to the transfer taxes, so it is important to consult a tax professional for guidance.
Gift and Estate Tax on Covered Expats
If you are a covered expat, you will be subject to gift and estate tax on your U.S. situs assets, regardless of where you live. U.S. situs assets include:
- Real estate located in the United States
- Tangible private property located in the United States
- Certain stocks and securities of U.S. companies
The tax rates are up to 40%.
Pre-Expatriation Analysis and Planning
Before deciding to expatriate, conducting a pre-expatriation analysis and planning is important. This includes:
- Assessing your net worth
- Tax liability
- Compliance with U.S. tax obligations
You should also consider the potential impact on your estate plan and the transfer taxes on gifts and bequests.
Investment Strategies Before, During and After Expatriation
Expatriation Done Right is a Measured Decision
Expatriation is a serious decision that should not be taken lightly. It is important to consider all the potential tax implications and seek the guidance of a tax professional. A measured approach can help ensure that you are making an informed decision in your best interest.
Economic Considerations
While the decision to expatriate should not be based solely on tax considerations, it is important to understand the potential economic benefits and drawbacks. Expatriation can provide greater financial flexibility and lower tax burdens, but it can also result in the loss of certain benefits, such as Social Security or Medicare. It is important to weigh these factors carefully and seek the advice of a financial professional.