Don't Let the Exit Tax Hit You on the Way Out
Expatriation refers to not simply leaving the U.S. and living abroad, but also to surrendering U.S. citizenship or permanent residency (i.e., green card). If someone does surrender U.S. citizenship, moves abroad and picks up a new citizenship, the U.S. government may be unable to recover taxes due to it by the expat (the U.S. will no longer have personal jurisdiction over the person). Consequently, the expatriation rules of the Code look to exact a tax from the expat while the U.S. still has jurisdiction. This is commonly referred to as the “exit tax.”
Expatriation may present a long-term income tax advantage. U.S. taxpayers are subject to federal income taxes on their worldwide income, whereas nonresident aliens (individuals who are neither citizens nor residents) are subject to tax only on their U.S.-source income.
The Heart Act introduces a mark-to-market regime for expatriates, by taxing the expatriate on all of the accrued appreciation in his property on the date of the expatriation. Expatriation is reported by filing IRS Form 8854. This is a one-time filing requirement and it replaces the 10-year filing requirement that existed prior to the Heart Act.
Bob Klueger Speaks about Outbound Taxation
Bob explains how the United States taxes the income from business operations of US taxpayers who do business outside the country.
The tax code is designed to do two things with respect to US taxpayers doing business abroad:
- It is designed to ensure that at least one country taxes the income of the taxpayer
- Assures that not more than one country attempts to tax the income
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