Expatriation Rules In a Nutshell

by Sanford Millar

The following is a short summary of the Expatriation rules as of 2012. You should note, that there are Bills in Congress to substantially modify the process.

A U.S. citizen who gives up U.S. citizenship or a long-term U.S. resident who gives up his/her residency status and who is a covered expatriate is subject to a mark-to-market rule under which his/her property is deemed to be sold on the day before the expatriation and he/she is taxed on the gain in excess of an inflation adjusted amount of $651,000 for 2012.

A covered expatriate is any U.S. citizen who relinquishes citizenship, or any long-term U.S. resident who ceases to be a lawful permanent resident of the U.S, who meets one of the following tests:

(1) the individual’s average annual net income tax for the period of 5 tax years ending before the date U.S. citizenship or residency is lost is greater than an inflation adjusted amount that is $151,000 for 2012, (2) the net worth of the individual as of the date U.S. citizenship or residency is lost is $2,000,000 or more, or (3) the individual fails to certify under penalty of perjury that he/she has met the requirements of the U.S. tax code for the 5 preceding tax years or fails to submit whatever evidence of his/her compliance that IRS requires.

All the property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value.This makes the valuation process extremely important. Any gain on the deemed sale is recognized notwithstanding any other nonrecognition rules and is taken into account for the tax year of the deemed sale, but losses may not be recognized if they would otherwise not be recognized. The basis of the assets will be adjusted by the amount of gain or loss taken into account.

A covered expatriate may make an election to defer the payment of tax attributable to any property that is deemed sold under the mark-to-market rule. This would include interests in closely held foreign business assets and real property interests. A tax deferred under these rules bears interest from the due date of the taxpayer’s return for the expatriation year and is permitted only if the expatriate provides adequate security.

Deferred compensation items (such as pension plans) of a covered expatriate are subject to special rules. Eligible deferred compensation is subject to 30% withholding. The present value of deferred compensation that is not eligible deferred compensation is treated as received by the covered expatriate on the day before the expatriation date as a distribution. In addition, deferred compensation items that would otherwise not be taken into account under Code Sec. 83 (stock options) will be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date.

The expatriation rules are complicated,and the summary above is not intended to be a comprehensive statement of the requirements or a recommendation to anyone to consider expatriation.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

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Sanford Millar

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