Expatriate Tax Appraisal

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email: david@myaacg.com
 
David Hahn, CVA, ASA, MAFF, CM&AA, CCIM, MBA


Expatriation "EXIT" Tax Appraisal

An expatriation tax (aka: exit tax or emigration tax) is a tax on persons who cease to be tax resident in a country. It is an “exit” tax because it applies to someone who is leaving the United States in a specified way—by termination of citizenship or permanent resident status.  This often takes the form of a capital gains tax against unrealised gain attributable to the period in which the taxpayer was a tax resident of the country in question. In the United States, which is one of the few countries to tax its overseas citizens, the tax is applied upon renunciation of citizenship or long-term US permanent residents who give up their green cards that have been held for 8 of the last 15 years. Both categories are subject to an immediate “exit tax” on unrealized gains on all their assets both in the US and worldwide, including grantor trusts, as well as on any future gifts or bequests to US citizens and residents, if any.

You may be subject to the covered expatriate and the related exit tax, if you meet any of the following criteria:

  • you have a net worth of US$2 million or more;
  • you have an average net U.S. income tax liability of greater than US$139,000 (thereafter indexed for inflation; $145,000 for people expatriating in 2009) for the five year period prior to expatriation; or
  • you fail to certify that you have complied with all U.S. federal tax obligations for the preceding five years.

Herewith, all property subject to gift tax and all property, where you hold a use right, are included for purposes of the net worth test.



Need of Exit Tax Appraisal

If you have a net worth less than $2 million and don’t meet the IRS income test after giving up US citizenship, you automatically owe no exit tax. If your net worth is over $2 million, you are what the IRS calls a “covered expatriate,” meaning you MAY have to pay exit tax. But you also may not, even if your net worth is $200 million or $2 billion.

So how can you tell what you would owe, if anything? You pay exit tax on unrealized gains as of the day before you give up your passport. In other words, it's as if you sold all your assets the day before you expatriated and paid whatever applicable tax would have been owed (long-term capital gains, ordinary income, etc.). If you own illiquid assets when you expatriate such as private companies or real estate, you'll need to get a fair market valuation done to determine what, if any, gains you would have had IF they had been sold. Here's a critical caveat in the calculation: You get a free pass, called the “exclusion amount,” on the first $626,000 in gains. If you're married and your spouse expatriates with you, the exclusion amount doubles to $1.252 million. For example, you and your spouse could expatriate with a stock portfolio showing $1.2 million in gains and not owe exit tax on it. Even if the portfolio tripled in value shortly after expatriating, you could sell it any time and owe no taxes.

To recap, if upon giving up US citizenship you own assets with unrealized gains of less than $626,000, you will not owe exit tax, no matter how wealthy you are. If you are required to pay tax it's less tax than you would have paid if you'd stayed in the U.S. and sold the assets. Plus, if any asset you pay exit tax on continues to rise in value post-renunciation, all those additional gains are yours.

We can do the following appraisals for the Exit Tax Compliance:
  • Private Company Business Valuation, full corporation, LLC, non-controlling minority stock
  • Commercial Investment Real Estate Appraisal
  • Life Insurance Cash Value - Fair Market Value
  • Stock Valuation - Deferred Compensation, IRA valuation
  • Trust Valuation
  • Gifts/Bequests Valuation
  • Intangibles/Intellectual Property Valuation
  • Fixed Assets Facility Valuation
  • Any other asset valuation to determine "Net Worth" of Exit Tax threshold any beyond

“Exit Tax” Applicability

The phrase “exit tax” consists of four different ways in which you pay tax when you give up U.S. citizenship or green card status:

  • Fair Market Value. The IRS pretends that you sold everything you own on the day before you gave up your citizenship or green card. You did your “pretend” sale at market price. (Hence the phrase “mark-to-market”). You pay tax on the capital gain on “pretend” capital gain you received.
  • IRAs and other specified tax-deferred accounts. The IRS pretends that all of these accounts were completely distributed to you on the day before you gave up your citizenship or green card. Pay income tax at regular tax rates.
  • Deferred compensation accounts. These are normal and normal-ish pension plans. If they are “good” deferred compensation plans, the IRS will take 30% of your monthly pension payment as tax, as the distributions are received by you, for the rest of your life. If they are “bad” deferred compensation plans, pretend they dumped the whole amount in your wallet on the day before you gave up your citizenship or green card, and do some complex math. Pay tax.
  • Trust distributions.
  • Gifts/bequests.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal or tax advice. Seek competent legal or tax counsel for advice on any legal or tax matter.







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