The Internal Revenue Service designates a Covered Expatriate as anyone in which any of the following paragraphs apply:
- Average annual net income tax liability for the five years ending before the date of expatriation is more than:
- $160,000 in 2015
- $157,000 in 2014
- $155,000 in 2013
- $151,000 in 2012
- $147,000 in 2011
- Net worth was at least $2 million on the date of expatriation.
- Failure to certify on Form 8854 that you complied with all federal tax obligations for the five tax years preceding the date of expatriation. That is to say, are you current with all income tax and information return filings?
In 2008 President George Bush signed into law the Heroes Earnings Assistance and Relief Tax Act (HEART). While providing tax benefits for military personnel, it imposes an Exit Tax on any covered expatriate.
The Exit Tax is assessed on unrealized gains as though the expatriate's worldwide properties were sold at fair market value on the day before expatriation (mark-to-market tax). Any resulting gains, after being reduced by $663,000, may be offset by unrealized losses with the net result being included in any other taxable income of the expatriate's last year in the United States.
Gifts from Covered Expatriate.
Gifts received by a US citizen or resident alien are not subject to income tax or gift tax. But if a US citizen or resident alien receives a gift or bequest from a covered expatriate, the recipient is subject to tax assessed at the highest marginal gift or estate tax rate (currently 40%) on the fair market value of the gift in excess of $14,000. If the gift or bequest is made to a United States Trust, the Trust is treated as a U.S. citizen and must pay the tax. If the gift or bequest is made to a foreign trust and in subsequent years the foreign trust makes a distribution of principal or income to a US citizen or resident alien the recipient is subject to tax assessed at the highest marginal gift or estate tax rate on the fair market value of the gift in excess of $14,000. Gifts or bequests made to a U.S. spouse or to a U.S charity are not subject to this tax.