Certain US citizens or long time permanent residents who renounce their citizenship or residence with the United States after June 17, 2008, may be liable for an expatriation tax. The expatriation tax applies to individuals who are deemed to be “Covered Expatriates” at the time of expatriation.
A Covered Expatriate is a person that meets any one of the following criteria: (1) A person who has an average annual net income tax liability for the five preceding taxable years ending before the expatriation date and adjusted annually for inflation that exceeds a specified amount ($145,000 in 2009), (2) A person who has a net worth of $2 million or more as of the expatriation date, or (3) A person who fails to certify under penalties or perjury that they are in compliance with all US federal tax obligations for the five years preceding the taxable year that includes the expatriation date.
The expatriation tax is determined based on a covered expatriates worldwide assets and is calculated under a mark-to market rule where the assets are treated as sold on the day prior to the expatriation date. The tax is calculated by taking the difference between the fair market value of the covered expatriate’s worldwide assets as of the date prior to expatriation and his adjusted basis in those assets. The covered expatriate is allowed to exclude $627,000 of any taxable gain in determining the amount of income that would be subject to the expatriation tax.
Once a person is deemed to be a Covered Expatriate, they retain such designation indefinitely and would be subject to a transfer tax on the transfer of any assets to a US beneficiary.
There may be significant tax consequences for persons who are classified as Covered Expatriates and the decision to expatriate should be carefully evaluated.