Tax

Exiting The US: Procedure And Taxes

Matthew Erskine , September 20, 2022

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The author of this article argues that while a number of US citizens talk of leaving the country, few understand how complicated and lengthy the process can be.

This article covers a subject that we have occasionally examined: Leaving the US. Sometimes, people express a wish to leave for political reasons, or due to tax, or maybe because of romantic or other reasons. As readers know, the Internal Revenue Service taxes Americans on a worldwide basis, rather than territorially, which applies in countries such as the UK, Germany, France and Singapore. 

To examine the subject from a new angle is someone who regularly comments in these pages, Matthew Erskine, managing partner of Erskine & Erskine, the law firm. The editors are delighted to share these views and invite responses. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com

With the increasing polarization of the country, I’ve heard more people say they’re thinking of leaving. Many speak from frustration, few people though actually understand what leaving the US, and giving up US citizenship, entails. It can be done, and the process has become easier since 2008, when the Hero's Earnings Assistance and Relief (HEART) Act was passed. It is, however, an expensive process for those who have any significant amount of wealth. 

Covered expatriates
The law covers people who leave and are either: 1) US citizens or, 2) long-term permanent residents who have held green cards for eight of the last fifteen years who give up their green card. Both are subject to an immediate "Exit Tax" on unrealized gains on their assets, both in the US and worldwide, including grantor trusts and future gifts to US citizens and residents.  

The exit tax 
You qualify as a covered expatriate if you meet any of the following criteria:  
 
Net worth
You have a net worth of $2 million or more, including all property that is subject to a gift tax and all property you hold a right to use or benefit from. 

Average income
You have an average income tax liability of more than $139,000 over the five years prior to leaving, indexed for inflation. 

Failure to certify
You fail to certify that you have complied with all US Federal tax obligations for the preceding five years. 

Exemption to covered expatriate status
People who would otherwise qualify as a covered expatriate are exempt either if they are dual citizens from birth and have not lived in the US for more than 10 of the last 15 years or are under the age of 18½  and have not lived in the US for the last 10 years. 

Mark-to-market for unrealized gains
The amount of the unrealized gains on assets to which the exit tax is applied is determined by the "mark-to-market" basis. This means that the assets are valued as if they had been sold at Fair Market Value on the day before the exit event. It includes any interest that would have been included in the gross estate for estate tax purposes. 

The first $600,000 of the calculated gains is exempt ($713,000 adjusted for inflation to 2019). This exempt amount is allocated pro rata across all of the assets. Any gain over this amount is subject to US income tax. 

The tax payment is due 90 days after giving up US citizenship. It is considered effective even if you do not file the Form 8854 Expatriation Information Statement 
 
Exception to mark-to-market requirements
The exceptions to the mark-to-market rule are few, i.e. certain deferred compensation items, specified tax-deferred accounts and non-grantor trusts (including offshore trusts). 

For the rest, such as IRAs, tuition programs (529 accounts), health savings accounts and so on, the entire amount is subject to immediate income tax. Once paid, no further tax is due on withdrawals on those accounts. 

Thirty per cent withholding
Deferred Compensation Plan assets are subject to a 30 per cent withholding at the time of the event and are subject to a 30 per cent withholding when the assets are paid out to a non-resident alien, resulting in up to a 51 per cent tax on retirement accounts.

Future gifts and bequests
As a covered expatriate, if you make a gift in excess of $15,000 a year (in 2019), the recipient (including trusts) must withhold tax at the highest marginal rate for gift or estate tax in effect at that time, with no regular allowances, as are allowed for US persons for unified credits etc.  

The gift is exempt if the gift is to a US spouse or a public charity.  

Procedure
To give up US citizenship you should:
1.  Open both a bank and investment account with a bank, or investment firm, that has no US connections;
2.  Obtain citizenship in another country;
3.  Leave the US; 
4.  Appear before a US Consul in that country and renounce your US citizenship; 
5.  Transfer assets into the non-US bank or investment company; 
6.  File Form 8854 Expatriation Information Sheet; and
7.  Pay the tax when due.   

Conclusion   
Leaving the US and giving up your US citizenship is possible, but costly, and shouldn’t be done without a great deal of planning.

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