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What Are the Tax Consequences of Expatriation?

 Posted on February 26, 2021 in Taxation Law

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:

  • Net worth test - Does the taxpayer have a net worth of at least $2 million on the date of expatriation?
  • Net income tax liability test - Was the taxpayer’s average net annual income tax in the 5 years before the date of expatriation above a specified amount? (For tax year 2020, this amount is $171,000.)
  • Tax compliance test - Is the taxpayer unable to certify that they complied with all federal tax obligations for the 5 years before the date of expatriation?

If the answer to any of these tests is “yes,” a taxpayer will be required to pay the exit tax on any assets for which they have an unrealized gain, although a certain amount of gain may be excluded. (For tax year 2020, this amount is $737,000.) A mark-to-market method will be used to calculate taxes as if assets were sold on the date of expatriation. For example, if a person owns real estate property that is worth $1 million, and they originally purchased the property for $500,000, exit taxes may apply to $500,000 of gain, even if the person will be retaining ownership of these assets. However if a person also holds $1 million in cash, exit taxes would not apply to this amount, since there is no unrealized gain for this asset.

Contact a San Jose Tax Law Attorney

By understanding how the exit tax may apply to your assets when you leave the United States, you can take steps to minimize your tax liabilities. If you are facing a tax audit or collection actions by the IRS, John D. Teter Law Offices can provide the legal help you need. Contact our San Jose, CA tax lawyer today by calling 408-866-1810 and scheduling a consultation.


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