Tax Considerations Before Giving Up US Immigration Status

Tax Considerations Before Giving Up US Immigration Status

Are You Considering Expatriating from the United States?

Expatriation is the process of formally giving up a person’s US status. As a result of giving up US person status, a person also gives up their US tax status so that they are no longer subject to U.S. tax on their worldwide income. There are two main categories of individuals who may become subject to the expatriation rules-United States citizens and Long Term Lawful Permanent Residents.  Let’s take a look at six (6) important considerations of Taxpayers have when they are considering expatriating from the United States.

Is the Taxpayer a Covered Expatriate?

One of the most important considerations for U.S. Taxpayers considering expatriating from the United States is whether they are considered a covered expatriate. If a person is considered a covered expatriate then they may also become subject to an exit tax at the time of expatriation. Conversely, when a person is not considered a covered expatriate they will not be subject to an exit tax– noting there are complications involving PFICs and proposed regulations for taxpayers who are giving up their US status even if they are not technically covered expatriates.

Does an Exception Apply?

Even if a person qualifies as a covered expatriate, they may also qualify for one of the exceptions, exclusions, and limitations such as dual citizenship and the minor’s exception.

Is the Taxpayer Subject to Exit Tax?

If a person is going to become subject to the exit tax, it is important that they plan accordingly. There are many different categories of assets and income that may be subject to the exit tax, which includes mark-to-market gains, specified tax-deferred accounts, and ineligible deferred compensation.

Can they Plan to Avoid Exit Tax?

Sometimes, if a Taxpayer prepares timely come with they may be able to limit or even eliminate the exit tax. This is especially true in situations in which a person wants to give a large gift to a U.S. citizen spouse and the US citizen spouse does not intend on expatriating as well. There are limitations when it comes to the gifting rules and timing is essential.

Will they be Residing in a Treaty Country?

This is especially important in situations in which the expatriate may continue to have assets and investments in the United States. That is because depending on whether or not the taxpayer resides in a treaty country, they may be able to follow W-8 BEN and claim treaty benefits which may reduce or even eliminate certain withholding on income carried remembering, that once a person is considered a nonresident alien, they become subject to a 30% withholding on most types of FDAP.

Do they Plan on Returning to the U.S. to Live?

Once a person expatriates, sometimes they may want to travel back to the United States for personal or business reasons. Taxpayers should consider which country they intend on expatriating to, which country they intend on residing in after expatriation, and whether there is a treaty with that country to determine whether there are various visas that may be available such as the treaty visa.

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