Taxation for US Expats
CITIZENSHIP-BASED TAX AND EXPATRIATION FOR AMERICANS ABROAD
At LS Wealth Management, we have a dedicated team experienced in assisting American clients living outside of the United States. These clients face the intricate challenges of citizenship-based taxation and expatriation.
WHAT IS EXPATRIATION?
Expatriation involves renouncing U.S. citizenship or permanent resident status. While this can be a tough choice, for some, it is necessary to lessen their tax burden or simplify their financial affairs. It is crucial to approach expatriation with careful planning.
BEING A COVERED EXPAT: TESTS AND EXCEPTIONS
If you are a U.S. citizen or permanent resident considering expatriation, it’s essential to understand the criteria and exceptions for being a covered expat. A covered expat is someone who meets one or more of the following criteria:
- Net Worth Test: If your net worth is $2 million or more on the day before expatriation, you are a covered expat
- Tax Liability Test: If your average annual net income tax liability for the five years preceding expatriation exceeds $190,000, you are a covered expat
- Certification Test: If you fail to certify compliance with all U.S. tax obligations for the five years before expatriation, you are a covered expat
There is an exception for dual nationals at birth who remain citizens of another country at the time of expatriation, provided they have not been U.S. residents for more than ten of the fifteen years ending with the year of expatriation.
EXCEPTIONS FOR DUAL NATIONALS
Dual nationals have a different threshold for the net worth test, set at $165,000 and adjusted for inflation. If your net worth is below this threshold, you won’t be considered a covered expat even if you meet other criteria.
CALCULATING THE EXIT TAX FOR COVERED EXPATS
Covered expats are subject to an exit tax on their worldwide assets, calculated on the unrealised gain as if the assets were sold the day before expatriation. The current tax rate is 30% on the net unrealised gain, with an exclusion amount of $821,000 (adjusted for inflation).
EXIT TAX ON DEFERRED COMPENSATION PLANS
Deferred compensation plans, such as 401(k) or IRA accounts, are also subject to the exit tax. This tax is based on the present value of these plans as of the day before expatriation, taxed at a rate of 30%.
SCOPE OF WORLDWIDE PROPERTY FOR NET WORTH TEST AND EXIT TAX
When calculating the net worth test and exit tax, all tangible and intangible assets globally are included, such as:
- Real estate
- Bank accounts
- Investments
- Intellectual property
TRANSFER TAXES ON GIFTS/BEQUESTS FROM COVERED EXPATS
Covered expats’ gifts and bequests to U.S. persons are subject to transfer taxes, including gift and estate tax, imposed on the fair market value at rates up to 40%. Some exceptions and exclusions apply, so consulting a tax professional is essential.
GIFT AND ESTATE TAX ON COVERED EXPATS
Covered expats are liable for gift and estate tax on their U.S. situs assets, regardless of their residence. U.S. situs assets include:
- Real estate in the United States
- Tangible personal property in the United States
- Certain stocks and securities of U.S. companies
PRE- EXPATRIATION ANALYSIS AND PLANNING
Prior to expatriation, conducting a thorough pre-expatriation analysis is essential. This includes evaluating net worth, tax liabilities, and ensuring compliance with U.S. tax obligations. It’s crucial to consider the potential impact on estate plans and transfer taxes related to gifts and bequests.
INVESTMENT STRATEGIES BEFORE, DURING AND AFTER EXPATRIATION
- Before Expatriation: Review investment strategies with a focus on potential tax implications
- During and After Expatriation: Consider tax-efficient investments such as exchange-traded funds (ETFs) or tax-managed mutual funds. Account for currency fluctuations in your investment decision
EXPATRIATION DONE RIGHT IS A MEASURED DECISION
Expatriation is a significant decision that necessitates careful consideration of all tax implications and professional guidance. Taking a measured approach ensures informed decision-making in your best interest.
ECONOMIC CONSIDERATIONS
While tax considerations are paramount, understanding the economic benefits and drawbacks of expatriation is crucial. Expatriation can provide financial flexibility and lower tax burdens, but it may also result in the loss of benefits such as Social Security or Medicare. It’s crucial to weigh these factors carefully and seek advice from a financial professional.
If you require further clarification on your tax situation, please reach out to our team of experts using the contact form, and a team member will promptly get in touch to assist you.
