Expatriation

People tend to think of “expatriation” as the act of relinquishing one’s citizenship. For tax purposes, however, the term has a broader meaning: both U.S. citizens who relinquish their citizenship and long-term U.S. permanent residents (i.e., those who have held a green card in at least 8 of the last 15 years) who give up their green cards are deemed to have expatriated. While there are many potential reasons for expatriating—some tax-related and some not—expatriating always generates tax consequences. Some of those consequences can be quite severe. As a result, anyone contemplating expatriating ought to consult in advance with experienced tax professionals. With proper planning, it may be possible to minimize the adverse tax consequences of expatriating. Furthermore, a failure to file the proper tax forms will almost certainly result in a worse tax outcome, so even if no planning is needed, obtaining advice on the filing requirements can be highly beneficial. Our attorneys analyze each client’s situation and design a plan of action to address that individual’s specific tax history and needs.

One key concept in the tax treatment of expatriation is the “covered expatriate.” If an individual who expatriates is a covered expatriate, various adverse tax consequences apply:

• The individual is subject to a so called “exit tax,” meaning that the individual is deemed, for capital gains tax purposes, to have sold all of the individual’s worldwide assets on the expatriation date, though the first $600,000 of gains is tax-free;
• Distributions from non-grantor trusts to the individual are subject to a 30% withholding obligation; and
• Gifts or bequests from the individual to U.S. beneficiaries are subject to a 40% inheritance tax.

There is, therefore, a high premium on not being a covered expatriate in order to avoid these adverse consequences. We help clients determine whether they would be treated as covered expatriates, and how they may be able to avoid that status.

Kostelanetz advises clients on all aspects of expatriation, from timing issues to avoiding the covered expatriate classification to identifying which tax forms should be filed and how they should be completed. For more information about expatriation, please contact Ian Weinstock, Wilda Lin or Heather Fincher to schedule an appointment.