In every presidential election cycle, citizens who fear the direction the country is going begin researching the steps to move to another country. This election in particular, many people (including celebrities like Whoopi Goldberg, Amy Schumer, John Stewart and more), publicly vowed to leave the country if their candidate lost. Adding fuel to the expatriate fire, on election night, the Canadian immigration website crashed ... twice. But before learning the words to “O Canada,” a potential expatriate should consider some of the tax consequences of renouncing their United States citizenship.
Individuals who are deemed “Covered Expatriates,” anyone with a net worth over $2 million, and/or more than an average of $165,000 of Federal income taxes over the last five years (based on the total value of the returns for each individual regardless of whether they filed jointly or separately), are subject to a deemed disposition or “exit” tax. This tax is determined by assuming that property interests were sold at market value the day before expatriation. These “sales” (and their phantom capital gains) must be reported on the relevant forms and schedules of Form 1040. The following example will demonstrate how the deemed disposition tax works:
Bill has an investment portfolio currently valued at $800,000, but his basis (i.e., purchase price) is only $300,000. Because Bill is considered, for other reasons, as a Covered Expatriates, when leaves the country and renounces his citizenship, he will owe taxes for $500,000 in gains, giving him a tax bill of around $85,500 for his home, regardless of whether he actually sales the investment portfolio.
In addition to the deemed disposition tax, renunciation also carries adverse gift and estate tax consequences. Gifts or bequests from Covered Expatriates to U.S. residents are, after any available exemptions or exclusions, subject to the highest gift and estate tax marginal brackets, currently a rate of 40%.
These financial complications may be why many of the celebrities who vowed to leave the U.S. are now getting cold feet.
Despite the pitfalls referenced above, the tax quagmire of expatriation can be navigated successfully with help and planning from a professional. If you are considering expatriation, or if you just have questions about the best estate plan for your family, contact the attorney’s at Altman & Associates at (301) 468-3220 to set up a consultation today.
- Christopher Martin, Esq.