I have heard people say, “If so-and-so is ever elected, I am leaving the country!” But what does leaving the U.S., and giving up U.S. citizenship, really entail? It is easier to do since the Heroes Earnings Assistance and Relief Tax (HEART) Act was passed in 2008. However, it is an expensive process for those with any significant amount of wealth.
Exit Tax
The law covers people who are either U.S. citizens or long-term permanent residents who have held green cards for eight of the last fifteen years and give up their green card. Both are subject to an immediate "Exit Tax" on unrealized gains on their assets, both in the U.S. and worldwide, including grantor trusts and future gifts to U.S. citizens and residents.
You qualify as a covered expatriate if you meet any of the following criteria:
• You have a net worth of $2 million or more, including all property that is subject to a gift tax and all property you hold a right to use or benefit from, as well as the unrealized gains on that property.
• You have an average income tax liability of more than $139,000 over the five years prior to leaving, indexed for inflation.
• You fail to certify that you have complied with all U.S. federal tax obligations for the preceding five years.
People who are dual citizens from birth and who have not lived in the U.S. for more than 10 of the last 15 years, and people who are under the age of 18-and-a-half and have not lived in the U.S. for theplast 10 years, are exempt.
The amount of the unrealized gains on assets to which the exit tax is applied is determined by the "mark-to-market" basis. This means the assets are valued as if they had been sold at fair market value on the day before the exit event. It includes any interest that would have been included in the gross estate for estate tax purposes. The first $600,000 of the calculated gains is exempt. Any gain over the exempt amount is subject to U.S. income tax in the year that you leave.
The exceptions to the mark-to-market rule are a few certain deferred compensation items, specified tax-deferred accounts and non-grantor trusts (including offshore trusts). For the rest, such as IRA's, tuition programs, 529 accounts, health savings accounts and so on, the entire amount is subject to immediate income tax. Once paid, no further tax is due on withdrawals on those accounts. Deferred compensation plan assets are subject to a 30% withholding at the time of the event and are subject to a 30% withholding when the assets are paid out to a non-resident alien, resulting in up to a 51% tax on retirement accounts.
The tax payment is due 90 days after giving up U.S. citizenship, and it is considered effective even if you do not file the Form 8854 Expatriation Information Statement
Future Gifts And Estates
As a covered expatriate, if you make a gift other than to a U.S. spouse or a public charity in excess of $15,000 a year (in 2019) the recipient (including trusts) must withhold tax at the highest marginal rate for gift or estate tax in effect at that time.