Considerations when you are thinking about giving up your US passport
Being an American living outside of the US can be difficult, with all of the complex reporting requirements and potentially adverse tax consequences of owning foreign securities. Sometimes, the seeming hassle sparks expats to want to give consideration to giving up their US passport. Below we will discuss a few of the many financial considerations associated with expatriation.
The process of expatriation can be different for people depending on their individual circumstances and whether or not you are considered to be what is called a ‘covered expatriate’. If any of the following three scenarios apply to you, and you expatriate post June 2008, then you are considered a ‘covered expatriate’:
1. Your average annual net income tax for the 5 tax years ending before the date of expatriation is more than $161,000 (2016].
2. Your net worth is $2 million or more on the date of expatriation.
3. You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
Under the expatriation rules of the Internal Revenue code, your worldwide assets are generally marked-to-market at the time of expatriation. This means that your assets are deemed to be sold and any gain arising from the deemed sale is taken into account for the tax year of the deemed sale. Individuals are allowed an exclusion of $693,000 (2016] whereby gains in excess of this exclusion are taxed at applicable capital gains rates. If a covered expat falls within the exclusion amount or has a net loss, they will generally not be liable for any exit tax.
There are some exceptions to covered expatriate status including individuals who are dual nationals from birth who have had limited or no period of US residence and children who expatriate prior to age 18.5. As there are very specific criteria that needs to be met, it is important to seek legal advice about individual circumstances to understand how the rules apply to your situation.
When an individual is considered a covered expatriate, the decision to move forward is often a family decision. This is due to the fact that US gift and estate tax implications can also arise on a covered expatriate’s future gift or bequest of property to a US person. This includes future gifts or bequests to children who remain US citizens or residents. The transfer tax would apply to all covered transfers, even if the transfer was made long after the covered expatriate went through the expatriation process.
There are many reasons to consider expatriation and many reasons to consider retaining your US citizenship whilst living overseas. Before expatriation, you should ensure that you give consideration to the following issues:
• Impact of timing events
• Maintain citizenship in another country
• Impact on personal net worth and net worth of family
• Impact on any existing or future beneficial interests in a trust
• Implications for estate planning for the expatriate’s immediate family members
• Understanding how various treaties may apply to your individual circumstances
• Comfort level and ability to reduce the amount of time spent in the US so as not to become a US person for income tax purposes
Taking the time to sit down and speak with a lawyer about your particular situation is well worth the time and effort to ensure that you reach a decision that is appropriate for your and your family’s needs. Understanding all aspects of the decision is important before moving ahead with such a big change.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.