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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
© 2011 The Wolf Group
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.
© 2011 The Wolf Group
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
© 2011 The Wolf Group
Provisions
IRC Section 877AIRS Notice 2009-85IRS Notice 97-19Form 8854 and InstructionsForm W-8CE and Instructions
© 2011 The Wolf Group
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
© 2011 The Wolf Group
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
© 2011 The Wolf Group
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
© 2011 The Wolf Group
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
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?
© 2011 The Wolf Group
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
© 2011 The Wolf Group
Tax on Deferred Compensation
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)
© 2011 The Wolf Group
Tax on Deferred Compensation
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.
© 2011 The Wolf Group
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
© 2011 The Wolf Group
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
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
© 2011 The Wolf Group
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
© 2011 The Wolf Group
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
© 2011 The Wolf Group
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Q & A