Have you decided to renounce your US citizenship and move abroad permanently? Whether it is for greener pastures or simply to be with your family in another part of the world, there are certain things that you should keep in mind before you take the final decision. One of which is the Exit tax or Expatriation tax, which refers to the tax that you must pay when you give up your U.S. citizenship or long-term resident status. In this article, we will discuss everything you need to know about Exit
tax/Expatriation tax and filing of IRS Form 8854.
What is Exit Tax/Expatriation Tax?
Exit tax/Expatriation tax is a tax that is imposed on people who renounce their U.S. citizenship or long-term resident status. Under the law, U.S. citizens or long-term residents who choose to renounce their status are subject to the Exit Tax. The Exit Tax is a capital gains tax that is determined by the fair market value of all their property and assets when they renounce their citizenship or resident status.
Filing of IRS Form 8854
If you’re thinking about renouncing your U.S. citizenship or long-term residency, there are regulations that you need to follow. According to the Internal Revenue Service (IRS), all expatriates must file IRS Form 8854, Initial and Annual Expatriation Information Statement. This form is used to provide the IRS with an extensive list of personal information, including your average net income in your last 5 years of residency in the US leading up to your expatriation. Failing to file this form can lead to significant penalties, and the IRS will continue to tax expatriates who do not file this form.
Determining if You Are Subject to Exit Tax/Expatriation Tax
Not everyone who gives up their U.S. citizenship or long-term resident status will be subject to the expatriation tax. To determine whether you are subject to the Exit Tax, the IRS will use two tests to look at
your financial position. Firstly, your net worth test exceeds $2,000,000 at the time of expatriation, and secondly, you have had an average tax liability of $171,000 per year for the past five years before expatriation. If either one of the above tests is true, you are considered subject to the Exit Tax.
Ways You Can Minimize Your Exit Tax/Expatriation Tax Liability
The tax laws can be complicated, and navigating them can be challenging, but there are some ways you can reduce your tax liability when you renounce your U.S. citizenship. One option is to take advantage of annual gift tax exclusions. The current annual gift tax exclusion is $15,000 per recipient, and you can make unlimited gifts tax-free to any number of individuals, as long as the gift doesn’t exceed the specified amount. You could also reduce your net worth by gifting assets to others before you expatriate. However, you should speak to a tax professional before attempting to make any large gifts as there may be hidden tax implications.
In conclusion, the Exit Tax/Expatriation Tax is an essential aspect of giving up U.S. citizenship or long-term residency, and you must seek professional advice before taking such a significant step. Hopefully, this
article has given you a better understanding of the Exit tax and the filing of IRS Form 8854. Remember, the rules, requirements, and regulations of the IRS are continually changing, so it’s essential to keep up to date with the latest information by checking the IRS website regularly and seeking professional advice from tax experts to ensure that you remain compliant with the regulations.
*** This article is for informational purposes only and does not constitute tax, legal, or financial advice. Before making any decisions related to taxes, please consult a licensed CPA, Enrolled Agent, or
other qualified professional. ***
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