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San Jose tax lawyer for exit taxThose who live in the United States may choose to leave the country and live elsewhere, but if this will be a permanent change, they should be aware that they may face certain tax consequences. Expatriation occurs when a U.S. citizen chooses to relinquish their citizenship. Expatriation will also apply to a lawful permanent resident who holds a “Green Card” if their immigration status is revoked or abandoned or if they notify the IRS that they will be commencing residence in a country that has a tax treaty with the United States. Expatriates may be required to pay an exit tax, and they will want to understand how the tax laws will apply to their situation.

Who Is Subject to the Exit Tax?

The exit tax (also known as the expatriation tax) is a form of income tax that applies to the potential gains a person would earn by selling or disposing of the assets they own. While capital gains taxes typically apply to the profits a person earns when selling assets, a taxpayer may not actually realize these gains until years or decades after they leave the United States. Exit taxes ensure that the IRS can apply the proper taxes to the gains a person earned while they resided in the United States.

The exit tax will only apply if a taxpayer meets the qualifying criteria to be a “covered expatriate.” Three tests are used to determine whether a person is a covered expatriate:

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San Jose tax lawyer for expatriatesPeople who live in the United States are required to pay a variety of different types of taxes. Because the U.S. Tax Code is so complex, taxpayers are not always aware of issues that may affect the taxes they pay, and they may encounter situations that trigger unexpected tax obligations. In addition to paying taxes while residing in the United States, taxpayers will also need to meet certain requirements when moving to other countries.

U.S. citizens who plan to relinquish their citizenship or permanent residency “Green Card” holders who will no longer be lawful permanent residents of the United States will need to follow expatriation procedures with the IRS. In some cases, an exit tax may apply, or a person may face a tax audit based on his or her compliance with tax obligations in previous years. By working with a tax law attorney, these individuals can understand their obligations and take steps to minimize penalties and avoid ongoing tax issues.

Preparing for Expatriation

All expatriates are required to file Form 8854 for the year in which they terminated their citizenship or ended their residency in the United States. This form certifies that a taxpayer has complied with tax obligations in the 5 years prior to expatriation. Expatriates who defer tax payments or compensation or who have an interest in nongrantor trusts will need to file Form 8854 annually.

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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.

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