1818 Society
The Exit Tax
Dale Mason, CPA
Robert Len, CPA, PFS
The Wolf Group
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
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
Overview
Applicable Provisions /Compliance Issues
Planning
© 2011 The Wolf Group
History
 New “exit tax provisions” applicable to persons who
relinquish their U.S. citizenship or terminate their longterm 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 877A
IRS Notice 2009-85
IRS Notice 97-19
Form 8854 and Instructions
Form W-8CE and Instructions
© 2011 The Wolf Group
Covered Expatriate
U.S. citizens who relinquish U.S. citizenship
 Termination of “Long-term residency”
• Green Card Holders cease to be lawful permanent
residents
o8 out of 15 years
oCounting of years important
oRevoked 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
Q&A
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
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 return
 Defer 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” tax
Specified 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
Q&A
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500
Compliance Issues
 Dual status tax return required for year of expatriation
 File Form 1040NR in subsequent years
 Form 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” status
 Surrender green card before becoming a long-term
resident (less than 8 year threshold) and obtain nonimmigrant 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
Q&A
The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500