By Gina Wallace, Director
Facebook co-founder and billionaire Eduardo Saverin was reported to relinquish his United States citizenship recently, prior to the initial public offering of Facebook.
With FATCA on the horizon this is clearly becoming more of a desirable option for some United States citizens. Equally however, expatriation is a sensitive issue for many who do not wish to lose their American identity, irrespective of having re-domiciled in another country often decades ago.
Expatriating from the United States can in itself create a tax liability by way of a mark-to-market tax known as the ‘exit tax’. The exit tax is invoked by any one of the following occurrences:
- the net worth of the individual exceeds US$2m or
- the average annual net income tax liability for the five years immediately before expatriation (applies where expatriation occurs after June 17, 2008 and is modified for expatriation prior to 17 June 2008), or
- failure to certify to the Internal Revenue Service that all Federal tax obligations for the five years preceding the date of expatriation have been met.
Not only United States citizens but Long Term Residents are subject to these expatriation rules. A Long Term Resident is defined as a Lawful Permanent Resident (ie green card holder) of the United States in at least eight of the 15 years ending with the year in which Long Term Resident status ceases. Years during which an individual was treated as a resident of a country other than the United States without having claimed treaty benefits are excludable years.
Such individuals whom meet any of the three limbs for the expatriate tax to be invoked are known as ‘covered expatriates’. There are exceptions however, for citizens whom are dual-citizens, and certain minors.
Dual citizens whom became a citizen of the U.S. at birth, and a citizen of another country, may qualify for an exclusion provided they continue to be a citizen of and are taxed as a resident of the other country.
The exemption for minors from treatment as covered expatriates is available if :
- the minor expatriates before age 18.5 years and
- the minor was resident (as determined by using the substantial presence test) of the United States for no more than 10 years prior to expatriation.
Covered expatriates are otherwise subject to income tax on the net unrealized gain in property which is deemed to be disposed of for its fair market value on the day before the date of expatriation.
The number of citizens and Long Term Residents who expatriated in 2011 (1,781) was more than four times the number who expatriated in 2000 (431).
Disclaimer: The contents of this article are intended to be general information only. No reliance should be placed on the information contained herein; specific advice should be sought in relation to any expatriation issues. NZ US Tax Specialists accepts no responsibility whatsoever for any loss or damages arising out of any error, omission or otherwise resulting from reliance on this article.
