Giving Up US Citizenship as a Covered Expat - What Does it Mean?
More US Expats than ever before are renouncing their US Citizenship, and – for some – the price of renunciation is high, especially if you’re considered a covered expat.
Are you thinking about joining the thousands of US Expats who have decided to renounce their US Citizenship? You may be under the impression that you will be free of your tax liability, and that is partially true; once you’re no longer an American Citizen, you won’t be required to file a US expat tax return.
Renunciation is costly for covered expats, though, and you must be current on your US expat tax obligations before you are recognized as having officially expatriated.
So what does it mean to be a covered expat?
If you meet any of the following guidelines, you are a covered expat:
- You had an 5-year average tax liability of $155K (for 2013), $121K (2012), $147K (2011), $145K (2009 and 2010);
- The net worth of your combined assets is $2M or higher; or
- You are not compliant with your tax filing and reporting obligations for the 5 year period preceding your desired expatriation date.
If you are a covered expat, the IRS will assume you sold all of your assets at FMV (Fair Market Value), and you will be taxed on the proceeds you would have received if your assets had actually been sold.
If you are considered to be a covered expat by the IRS, you will be subject to a tax rate of 39.6% of the FMV of your assets before you can renounce your US Citizenship. The IRS allows an exclusion of $668K from this tax, so if the FMV of your assets is less than $668K, you will not be taxed on the assumed sale of your assets. If the FMV of your combined assets is more than $668K, you will pay the 39.6% tax rate on the overage.
You will be able to defer payment on the mark to market tax associated with property, and you can also defer payment on certain deferred assets like retirement accounts.
In order to defer the payment of the mark to market property tax or your tax-deferred assets such as your IRA, you must be proactive in your planning, because there is another set of rules. If you are considering expatriating from the United States and want to take advantage of these deferred payments, get in touch with an experienced US expat tax professional.
I.J. Zemelman, EA is the founder of Taxes for Expats