US citizens who relinquish their citizenship and long-term residents who end their residency are subject to the Expatriation tax provisions.
A long term resident (LTR) is a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends.(10 Years for certain dual citizens and certain minors).
If you expatriated after June 16, 2008, you are a covered expatriate if any of the following apply:
- Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $161 000 for 2016
- Your net worth was $2 million or more on the date of your expatriation
- You fail to certify that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.
If any of the conditions above applies, a covered expatriate is subject to income tax on the net unrealized gain in any property as if the property had been sold for its fair market value on the day before his (her) expatriation date. A special deduction of $693 000 (2016), allocated prorata to each asset, reduces the net gain.
The taxpayer can defer the payment of the tax but interest is charged for the period the tax is deferred and you must provide a guaranty such as a bond. The tax will be due for the tax year the taxpayer disposes of the property but cannot be extended after his death or if the guaranty provided is no longer satisfactory.
Please note the tax compliance. If you believe you are not concerned with this expatriation tax because your net worth is below the $2 million but have not or could not certify that you have complied with all federal tax obligations the last 5 years, then, you could be subject to this tax. We always urge our customers to issue a tax return every year even if there is no tax due.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question.