Americans are renouncing their citizenship in record numbers, in 2016 alone 5,411 Americans chose to give up their passport. It looks like 2017 will be about 6,800. Here’s how to escape the exit tax when you give up your US citizenship… or, at least, minimize it.
While it is safe to assume that some left the country for disagreements they had with Trump’s government, they’re not the majority. Americans rarely leave the US for political reasons. They talk a lot, but those who act cite taxes as the the primary reason they gave up their US citizenship.
More than 57 percent of Americans say that they pay too much in federal income taxes. America leads the world in high corporate tax rate, forcing many of its business entrepreneurs to open companies and obtain citizenships in different countries with a more relaxed corporate tax system. And the US imposes some of the highest personal income tax rates in the world.
And don’t expect this to change under Trump’s new tax proposal. Yes, corporate rates will go down to 20%. Personal rates will go down a bit, but US citizens abroad will still be taxed on their worldwide income!
If you’re thinking about giving up your citizenship, remember that the IRS won’t let you leave the without paying an Exit Tax.
Yes, you read that correctly. Some Americans who decide to renounce their American passport have to pay an Exit Tax. The Exit Tax is measured as if you sold all of your assets the day before you left the United States. Net capital gain is taxed instantly. This can be extremely costly for high-net worth individuals.
Not Everyone who leaves the United States pays an Exit Tax
The first thing you need to do is see if you qualify. Only United States citizens and long term residents, such as green card holders, pay an Exit Tax. Meaning that, if you are working in the United States with any type of employment visa like an H-1B you don’t need to worry about the Exit Tax.
Also, if you hold another citizenship besides the United States by birth you don’t have to pay the Exit Tax. Purchasing a second passport doesn’t count!
Finally, children who expatriate before age 18 ½ are exent to paying the Exit Tax.
There needs to be a Reason
You can’t be forced to pay an Exit Tax just because you are a citizen or a long term resident, there needs to be an explanation for the action. You need to personally renounce your citizenship or have your citizenship taken away. Having your citizenship taken from you makes you an expatriate according to the exit tax rules. That is to say, you must actively renounce your US citizenship. You don’t lose it by being abroad or by taking a second passport.
If you have a net worth of more than $2,000,000 you qualify for the Exit Tax.
f you as your spouse are worth more than $2,000,000, and all assets are in your name, a solution would be to gift some of those assets to your wife or partner. That way you could have $4,000,000 between the two of you and you wouldn’t have to pay the exit tax when you left the country together.
This changes when your wife is not a US Citizen. For 2017, there is an annual exclusion of $149,000 for gifts to noncitizen spouses.
Historic Tax Liability
No matter your net worth, you will pay the Exit Tax if you have an average net income tax liability for the five tax years before the year of expatriation $162,000, That’s the 2017 number and it increases with inflation each year.
If you can prove that your average doesn’t reach 4162,000 then you won’t have to pay the Exit Tax.
If you cannot certify five years of U.S. tax compliance, then you have to pay an Exit Tax. Fortunately, you can amend your prior tax returns (and other forms) and simultaneously also file a Form 8854 to expatriate.
That is to say, you can get into compliance and then file to give up your US citizenship.
Second Passport and Second Residency Programs
There are two ways to get a second passport. You can buy one or you can earn it by being a resident of certain countries for 5 or 6 years.
For example, you can buy a passport from St. Lucia for about $125,000. St. Lucia is the best purchase program for 2018.
If you don’t have the cash, you can earn your passport over time. The lowest cost residency program for US citizens is Panama. Invest $20,000 in their reforestation visa program and get residency. Maintain that residency for 5 years and you can apply for citizenship.
If you want an EU passport, consider Portugal’s Golden Visa program. Deposit 1 million euros or buy a property for 500,000 euros and you’re in. Maintain that visa for about 6 years and you can apply for citizenship.
I hope you’ve found this article on the Exit Tax to be helpful. For more information, or for assistance with renouncing your citizenship and opening an offshore bank account in Panama or any other country, please contact us at firstname.lastname@example.org or call us at (619) 550-2743. We’ll be happy to assist you with your international tax plan and support you through the coming changes.