How can I avoid US exit tax?
In order to even be subject to the IRS covered expatriate and exit tax rules, a person must be a U.S citizen or long-term legal permanent resident. Therefore, the easiest way to avoid the long-term resident exit tax trap it is to simply avoid becoming a legal permanent resident.
Who Must Pay the Exit Tax? Not everyone who leaves the US is required to pay an exit tax. Only US citizens and long-term residents the IRS considers “covered expatriates” are subject to this tax if they renounce their citizenship. The US exit tax is a tax on your worldwide assets.
Under Internal Revenue Code (IRC) sections 877 and 877A, the US exit tax applies to US citizens or green card holders who are deemed covered expatriates (see below) when they renounce their citizenship or permanently leave the US for federal tax purposes.
The expatriation tax provisions (prior to the AJCA amendments) apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their U.S. residency for tax purposes, if one of the principal purposes of the action is the avoidance of U.S. taxes.
Not every green card holder will be subject to exit tax. Only long-term permanent residents may have to pay exit tax. And then only if they meet one of three exit tax rules. (More about those rules in a moment.)
The government fee to renounce U.S. citizenship is $2,350. Additional costs might apply if you have to become tax compliant. You must be tax compliant for five years in order to renounce your US citizenship.
If things go wrong, you won't have a cushion to fall back on. In some situations, renouncing may worsen your tax situation, especially if all your money is being made from US-source investments like US stocks and properties. Renouncing is best for those who no longer rely on the United States for money.
In general, yes — Americans must pay U.S. taxes on foreign income. The U.S. is one of only two countries in the world where taxes are based on citizenship, not place of residency. If you're considered a U.S. citizen or U.S. permanent resident, you pay income tax regardless where the income was earned.
You can also still receive your 401(k) and pension, albeit both are subject to US taxes and possibly taxes in your new country. You may have to file a 1040NR return unless there is an automatic withholding.
The purpose of the Exit Tax is to prevent companies from avoiding tax when relocating assets. The rules provide for an Exit Tax on unrealised capital gains. This might occur where companies, without making an actual disposal, migrate their residence or transfer assets offshore.
When did the US impose an exit tax?
The 1966 law created Internal Revenue Code Section 877, which allowed the U.S.-source income of former citizens to be taxed for up to 10 years following the date of their loss of citizenship.
- appear in person before a U.S. consular or diplomatic officer, in a foreign country (normally at a U.S. Embassy or Consulate);
- sign an oath of renunciation.
- pay a $2,350.00 fee.
Tax Deferred Specified Accounts (Traditional IRA)
At the time of exiting the U.S., they are required to gross up the value of the IRA for example — and other similar types of tax deferred specified accounts – and include it in their income.
Although some Permanent Resident Cards, commonly known as Green Cards, contain no expiration date, most are valid for 10 years. If you have been granted conditional permanent resident status, the card is valid for 2 years.
A lawful permanent resident (green card holder) for at least 8 of the last 15 years who ceases to be a U.S. lawful permanent resident may be subject to special reporting requirements and tax provisions. Refer to expatriation tax.
Unlike the situation for lawful permanent residents (green card holders), a U.S. citizen can't lose citizenship solely by living outside of the United States for a long time.
Whether it's due to disagreements with policy directions such as on immigration, climate change, abortion, or LGBTQ+ rights, or concerns about increasing tax obligations, or a desire for a more worldly and nomadic lifestyle, still, a decision to renounce one's U.S. citizenship should not be made lightly.
A U.S. citizen may acquire foreign citizenship by marriage, or a person naturalized as a U.S. citizen may not lose the citizenship of the country of birth. U.S. law does not mention dual nationality or require a person to choose one citizenship or another.
* Both relinquishing and renouncing US citizenship result in a loss of citizenship. However the difference lies in the date when the loss takes effect. Relinquishing is a form of renunciation.
Why does the US charge a citizenship renunciation fee? The renunciation fee is in place to cover administration costs. Applicants must take an oath of renunciation before a US diplomatic or consular office abroad and will then receive a Certificate of Loss of Nationality of the United States (CLN).
Can you come back to the US after renouncing citizenship?
Furthermore, a person who has renounced U.S. nationality will be required to apply for a visa to travel to the United States, just as other aliens do. If found ineligible for a visa, the person could be barred from the United States.
The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live or earn their income. This means that American expats are potentially subject to double taxation – once by the country where they earn their income, and again by the United States.
For individuals who are dual citizens of the U.S. and another country, the U.S. imposes taxes on its citizens for income earned anywhere in the world. 7 If you live in your country of dual residence that is not the U.S., you may owe taxes both to the U.S. government and to the country where the income was earned.
The IRS charges penalties for both late filing and late payments. If your lack of filing is willful—meaning you knowingly avoided your US tax requirements while living abroad—then more serious legal consequences may apply. Failure to File Penalty: 5% of the unpaid taxes for each month the tax return is late, up to 25%.
The SSN number remains valid.
There are exceptions, especially if the individual lived in the United States for a long period of time, or if he or she is a citizen of certain countries for which the United States has an agreement.
