The Exit Tax is imposed on any covered expatriate. It is calculated on unrealized gains as though the expatriate's properties or gross estate owned worldwide were sold at fair market value (FMV) on the date before expatriation. This deemed sale is reduced by the exclusion amount ($699,000 in 2017). Note that Deferred Compensation items are generally subject to this tax.
Suppose Joe Expat renounces his US citizenship on 30 June 2015. The day before his renunciation, Joe owned three assets:
FMV Cost or Basis Gain/Loss
A. Business Real Property $2,000,000 $200,000 $1,800,000
B. Personal Residence 500,000 800,000 (300,000)
C. Other Personal 1,000,000 800,000 200,000
1. Allocate the $690,000 exclusion amount to the gains as follows:
1,800,000 / 2,000,000 x 699,000 = 629,100
200,000 / 2,000,000 x 699,000 = 69,900
2. The deemed gain on each asset:
Asset A: 1,800,000 - 629,100 = $1,170,900
Asset C: 200,000 - 69,900 = 130,100
3. This deemed gain of $1,301,000 (1,170,900 + 130,100) must then be included in any other taxable income of the covered expatriate's final tax year in the United States.
A covered expatriate is 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:
- $161,000 in 2016
- $160,000 in 2015
- $157,000 in 2014
- $155,000 in 2013
- $151,000 in 2012
- 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.
If the expatriate became at birth both a US citizen and a citizen of another country and if on the expatriation date continues to be a citizen of and taxed by the other country and if the expatriate was a US resident for not more than ten taxable years during the fifteen taxable years ending on the date of expatriation, he/she will not be considered as meeting either the tax liability or net worth tests. Also if the expatriate relinquishes US citizenship before age 18 1/2 and has been a US resident for less than ten taxable years before the date of relinquishing that citizenship, he/she will also not be considered as meeting these tests.
Deferral of Tax.
Payment of the Exit Tax is due within 60 days of the expatriation date. The tax may be deferred by providing IRS with adequate security such as an acceptable bond. This shall be conditioned on payment of the tax and interest thereon of else letters of credit.
Reportable properties for the deferral include any interest in money or other property, any interest in the right to use property, and beneficial interest in a trust other than a non-grantor trust. Excluded items are deferred compensation plans and non-grantor trusts. Instead these exclusions are subject to a 30% withholding tax.
Deferred compensation items generally include:
Any interest in a qualified plan
Any interest in a foreign pension or similar arrangement
Any 'item of deferred compensation'
Any interest in property to be received in connection with performance of services
When deferring payment of the tax, Form 8854 must be filed annually until the tax and interest are fully paid. Otherwise the deferred tax is due within 90 days of the expatriation act.
While the Exit Tax is calculated on total cash and properties, the deferred portion of the tax is calculated on unsold properties.
Note that in the event of a deferral of payment of the exit tax, the covered expatriate must appoint a US agent to accept any IRS correspondence and to permit timely enforcement and implementation. A deferral agreement to defer payment of the tax must be filed with the agent agreement at: 7850 SW 6th Court, Mail Stop 5780, Plantation FL 33324-3202.
The National Debt is more than $20.6 trillion. US total interest paid is $2.6 trillion. Some forecasters predict that the interest can balloon to as much as o $8t by 2020. Total US debt based on household, business, state and local governments, financial institutions and the Federal Government has now exceeded $69t.