The Wolf Group, PC 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 Tel: (703) 502-9500 1818...

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

1818 Society The Exit Tax

Dale Mason, CPARobert Len, CPA, PFS

The Wolf Group

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any U.S. tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

© 2011 The Wolf Group

The Exit Tax Agenda

History OverviewApplicable Provisions /Compliance IssuesPlanning


History

New “exit tax provisions” applicable to persons who relinquish their U.S. citizenship or terminate their long-term residence status after June 16, 2008

Prior law: Generally a 10 year alternative tax regime• First enacted 1966• Strengthened in 1996 to include “long-term

residents”• Presumptive tax avoidance if assets/income

thresholds reached• 2004 law eliminated subjectivity & increased

asset/income thresholds© 2011 The Wolf Group

Exit Tax Overview

Section 877A: “Mark-to-Market” tax on gains exceeding $636,000 (2011) and distribution of certain deferred compensation

Deemed sale of worldwide assets on the day prior to expatriation

Applies to “covered expatriates”• Renounce or relinquish U.S. citizenship• Termination of “long-term residency” status (GCH 8 out of 15yrs)• Net worth exceeds $2 million• Average 5 year tax liability exceeds $147,000 (2011)

Exceptions for dual-nationals (at birth) and expatriation before 18 ½ years old.


Exit Tax Overview

Imposition of a tax at the highest gift or estate tax rates on receipt by a U.S. person of a “covered gift” or bequest from a “covered expatriate”• Recipient pays the tax

Special rules apply to assets held in trust by a “covered expatriate”

Compliance requirements: Form 8854 and W-8CE


Provisions

IRC Section 877AIRS Notice 2009-85IRS Notice 97-19Form 8854 and InstructionsForm W-8CE and Instructions


Covered Expatriate

U.S. citizens who relinquish U.S. citizenshipTermination of “Long-term residency”

• Green Card Holders cease to be lawful permanent residentso8 out of 15 yearsoCounting of years importantoRevoked or abandoned (not simply expired)oTreaty tie-breaker provision

Failure to file Form 8854


Income Tax & Net Worth Tests

Income tax test• Each taxpayer responsible for joint liability

Net worth test• Global assets minus global liabilities• Value of assets determined under “gift tax principles”• Tax liability determined under “estate tax principles” • Present value of pension is included in net worth

calculation


Net Worth Test Cont.

Present value of World Bank pension included in net worth test• We believe that the taxpayer should use a special discount

rate applicable to defined benefit plans• Actual calculation should be made by the Bank or an

actuary



Q & A

Mark-to-Market Tax

$636K exclusion amount allocated pro rata to all assets having built-in gain

Green card holders are deemed to have basis in assets equal to FMV of assets on date first became a tax resident.

Gains/income included in final U.S. resident tax returnDefer tax?


Tax on Deferred Compensation

Not part of “Mark-to-Market” tax calculation

Deferred compensation • U.S. and foreign retirement plans

Eligible deferred compensation• Applicable to payments of deferred compensation made by U.S.

payors• Payor must deduct and withhold 30% withholding tax



Ineligible deferred compensation• Non-U.S. payor who fails to make the election to

become U.S. payor• Present value of the covered expatriate’s “accrued

benefit” is treated as being received on the day before expatriation

• W-8CE presented to payor. Payor should provide the amount of the PV of accrued benefit within 60 days (Rev. Proc. 2004-37)



Present value of “accrued benefit” does not include ineligible deferred compensation attributable to services performed outside the U.S. before the person became a U.S. citizen or green card holder.


Specified Tax Deferred Accounts

Not included in the “Mark-to-Market” taxSpecified Tax Deferred Account:

• Individual Retirement Accounts• Coverdale education accounts• Health savings account

Deemed distributed on the day before expatriation date

No early withdrawal penalty



Q & A

Compliance Issues

Dual status tax return required for year of expatriationFile Form 1040NR in subsequent yearsForm 8854

• Must certify compliance with all U.S. tax obligations for past 5 years (otherwise will automatically be considered a “covered expatriate”)

• File the Form 8854 by the due date of tax return• Make election for “step-up” of assets at date of becoming

a lawful permanent resident• Penalty for failure to timely file is $10,000

Form W-8CE


U.S. Gift/Estate Tax Consequences

U.S. citizen or resident receives property either by gift or bequest from a “covered expatriate”

Transfer of the property is subject to tax• $13,000 annual exclusion applies

Equal to the value of the property multiplied by the highest rate of tax for federal estate tax or gift tax

The tax is payable by the recipient


Exit Tax Planning

Hold on to “long-term resident” statusSurrender green card before becoming a long-term

resident (less than 8 year threshold) and obtain non-immigrant visa

Surrender green card before income tax/asset thresholds met and obtain non-immigrant visa

Become a U.S. citizen!• File U.S. taxes forever



Q & A

The Wolf Group, PC 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 Tel: (703) 502-9500 1818...

Documents

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