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Expatriation
- Taxpayers may expatriate to avoid US tax reporting requirements. In most countries if you break residency you only file and pay tax on source income in your former home country. The US on the other hand continues to require reporting of worldwide income and paying tax on it.
- If a US citizen expatriates, it is possible that the worldwide tax burden could actually increase since the US tax rate may be higher than the foreign tax rate. There are two ways individuals can mitigate the US tax on foreign earnings. There is a foreign earned income exclusion $105,900. So, you can exclude up to $105,900 of foreign earned income if certain requirements are met. You have to be a bona fide resident of a non-US country or present for 330 full days in a 12-month period in that foreign country.
- Some taxpayers choose to expatriate to avoid the rigorous US tax compliance requirements and costs. But expatriation is not simple or inexpensive.
- A US citizen may relinquish their citizenship and there is a long-term resident of the US. The latter is a person who held a US Green Card for any portion of 8 out of the last 15 years. If certain conditions are met, e.g. a certain level of income tax liability, you may be required to pay a toll tax on all of your assets. This requires marking asset values to market value the rate is the highest income tax rate. Form 8594. This is nearly equivalent to paying an estate tax (but the tax is assessed on the appreciation of assets, so you get credit for tax basis). This is as if you sold all assets at their fair market value at the date of expatriation. This cost to expatriate is very high.
- For Green Card holders one way to avoid the exit tax is to pay careful attention to counting time. If you want to give up your Green Card you have to go through a formal relinquishment process. You should retain an immigration attorney to help with this as merely abandoning the Green Card won’t relieve you of your obligation to file and pay US income taxes.