Expatriation Tax Planning for Citizens Leaving the United States

Expatriation Tax Planning for U.S. Citizens

Expatriation is the formal process of terminating U.S. Person status for income tax purposes. And, there are only two categories of individuals who have to go through the formal expatriation process.  It is limited to U.S. Citizens and Lawful Permanent Residents who qualify as Long-Term Lawful Permanent Residents (LTR).  

The most common reasons that taxpayers goes through the formal expatriation process is that they are either:

• • • They are retiring overseas,

    • They ‘overstayed’ their U.S. Green Card accidentally,

    • They naturalized for Travel purposes, or

    • They have family abroad.

Most people do not expatriate only because they are just seeking to live the perceived ‘zero tax’ lifestyle – since those strategies and methods do not work in real life. There are many tax and legal complexities with expatriation. Taxpayers should be very cautious about getting caught up in online shams about creating various expatriation trusts, becoming tax nomads, and paying zero taxes. For most wealthy taxpayers, living the carefree global citizen lifestyle that some of these companies are selling you is just a gimmick.

We understand that it can be very alluring to think you can just throw off the shackles of the United States’ tax system, go offshore, and become a global citizen with no tax liability but the process is much more complicated and oftentimes costly than how it is being sold. And, before expatriating, U.S. Taxpayers must consider the following:

Do You have U.S. Real Estate?

Once you become an expatriate you are no longer a U.S. person but rather a non-resident alien and non-resident aliens are subject to FIRPTA (Foreign Investment in Real Property Tax Act). When a resident alien has investments in US property, they are subject to a significant amount of withholding on both rental income generated and gross sale price of a property — and the withholding may far exceed any profitability that was generated on the property. Therefore, when considering expatriation, one thing to consider is whether or not the taxpayer should sell their real estate.

Future 401K Withholding at 30%

For Taxpayers who expatriate and are considered covered expatriates, there can be lingering U.S. taxes on certain eligible deferred retirement plans they own in the U.S. For example, when a covered expatriate exits the U.S., their remaining 401K will be taxed at 30% and they irrevocably waive the right to use treaty elections to reduce taxes.

U.S. Investments, FIRPTA, and 30% Withholding

Many taxpayers who expatriate intend to continue investing in the United States. It is important to note that most of the income generated is considered passive (FDAP) income and subject to a 30% withholding rate. But, if the Taxpayer plans accordingly, then even if they invest in U.S. assets, they can plan around the FDAP flat tax rate by investing in income that is considered sourced where the taxpayer lives and not the location of the asset – to avoid U.S. taxes.

Does Your Passport Secure Travel You Want?

Before Expatriating, be sure that the second passport you have provides you with the necessary travel perks you are seeking, if any. If travel is not your main concern, then this is not a big issue – if travel is the enticing factor, then you should see about second passports but be sure to research the passport before acquiring it.

Have You Already Opened Local Accounts?

It can be difficult for Taxpayers who were born in the U.S. to open foreign accounts – even after they expatriate – due to FATCA (Foreign Account Tax Compliance Act). Taxpayers should be sure they have access to an account in a country they require before expatriating.

Are You Closing a U.S. Business?

Closing and inverting a U.S. business to a foreign business is a big undertaking and generally not as simple as just closing the U.S. business and launching it overseas as a foreign entity.

What If You Do Not Expatriate?

For taxpayers who are not technically expatriates from the United States — but just going offshore or moving assets offshore —  just moving their assets overseas will do nothing to reduce the tax liability — and little to protect your assets. And, acquiring more foreign assets and trusts will significantly increase their reporting requirements on various international information reporting forms such as the FBAR, Form 8938, Form 5471, etc. In addition, due to the various fees and additional non-creditable taxes that foreign countries levy, a U.S. person may find themselves in a much more complicated tax situation than they were previously resulting in paying additional taxes in foreign countries as well as having a much more complicated U.S. tax return due to the strict enforcement of the international reporting protocol by the IRS and FinCEN.

Use a Licensed Attorney/Tax Professional

If you are going to pay a non-licensed individual tens of hundreds of thousands of dollars to create an individualized plan for you, the first thing you need to do is obtain real information about the individual and company that is offering these services. Attorneys are licensed in different States, and you can find their information on the various bar websites. CPAs are also licensed and you can find their information on the websites as well. If you are unable to verify anything about a person who is offering these types of services, how could you possibly entrust them to your seven or eight-figure investment portfolio?

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure and expatriation.

Contact our firm today for assistance.