If you are a green card holder planning on going back to your home country or a US citizen renouncing citizenship and moving to a foreign country, you may be subject to the US expatriation tax, but ….
Perhaps the least welcome and most unpleasant surprise for expatriates is finding out that their permanent departure from the US comes with a slew of tax compliance and reporting obligations that must be fulfilled when they leave. These obligations could come in the form of a burdensome tax bill.
On the other hand, with awareness, education, and sound tax strategies and planning, you may be able to mitigate exposure to the exit tax.
Who is Subject to the Exit Tax?
The expatriation tax rule only applies to U.S. citizens or long-term residents, defined as a lawful permanent resident in any part of 8 of the 15 year period ending with the expatriation year.
If you are neither of these, the exit tax does not apply to your situation.
But even if the above does apply you may still be able to mitigate tax exposure if, under IRS tests, you are not considered to be a “covered expatriate”.
There are three tests for determining if an individual is covered and therefore subject to the exit tax:
- The Tax Liability Test - Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than $165,000 (2018).
- The Net Worth Test - Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- The Certification Test - You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If you fall under the threshold of the tax liability and net worth test, you will not have an exit tax obligation. Sound strategies and long-term planning are a key to not qualifying as a covered expatriate.
What is the Exit Tax in the first place? What are the strategies to avoid the Exit Tax? Download our complimentary eBook, 6 Overlooked (and Troublesome) US Tax Obligations for Expats, for the answers to these questions and more.