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How the IRS Computes an ‘Exit Tax’

 Posted on March 31, 2017 in Taxation Law

San Jose tax law attorney, exit taxIf you a considering moving outside of the United States and renouncing your citizenship or long-term green card, there are important tax considerations you should review.

One of the most important determinations is whether you are a “covered expatriate,” as this group must pay an Exit Tax. There are steps you can take to avoid being classified as a covered expatriate.

The Exit Tax is calculated by the IRS as if you sold your assets and reported the gains. Net capital gains are taxed at rates of up to 23.8 percent. In 2017, the first $699,000 of gain is not subject to the Exit Tax.

Who Qualifies as a Covered Expatriate?

1. Anyone with a net worth of over $2 million. Net worth includes your assets anywhere in the world, including your assets in the U.S. There are several complications if you are married.

The net worth of each spouse will be calculated separately. If the husband or wife owns most of the assets, it may be possible for a spouse to gift assets to the other in order to bring each person’s net worth under $2 million. For receiving spouses who are U.S. citizens, such a gift may not be taxed.

If your spouse is not a U.S. citizen (even if he or she is a green card holder), then the gift may be subject to the gift tax if over $149,000 (in 2017). If more assets than this need to be transferred between spouses to come in under the $2 million net worth cut off, you could avoid the gift tax by making the transfers over a number of years or by relying on a unified tax credit.

2. Anyone with an average net annual tax liability over the past five years of over $162,000. If you are married, then you must use the tax liability on your joint returns. Thus, one way to avoid this trigger is to file your income taxes separately. This may have to be done for several years before you renounce citizenship. 

3. Anyone who cannot certify tax compliance for the past five years. Typically, this can be remedied by amending your tax returns when you file the form signaling your expatriation.

Contact a Santa Clara County Tax Attorney

This is a complex area of tax law, and with professional counsel you may be able to save yourself from paying the Exit Tax altogether. To learn more about the tax implications of expatriating, call the knowledgeable San Jose tax law attorney at John D. Teter Law Offices at 408-866-1810 to set up your first meeting.


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