Common Expatriation Exit Tax Mistakes
Common expatriation mistakes: The IRS rules involving expatriation and exit tax for covered expatriates are very complicated. When an expatriate is considered a covered expatriate, they may have to pay an exit tax. Whether or not they have to pay the exit tax, covered expatiates must perform a detailed analysis involving the unrealized capital gain for their U.S. and worldwide assets. In addition, they may have a deemed distribution for such assets as ineligible deferred compensation, tax deferred accounts, and certain trust ownership.
Here are some of the common mistakes we find with expatriation and exit tax preparation.
Long-Term Resident vs. Long-Term Visa Holder
Just a because a person has lived many years in the United States, does not mean they can be subject to the covered expatriate rules.
A person must be either a U.S. Citizen or Long-Term Legal Resident before they can even be considered a covered expatriate.
Still, if a person is a long-term visa holder or other long-term resident (but not an LTR per se), they may have other tax issues, including:
- Substantial Presence Test
- Sailing Papers
- 183 Day Capital Gain Rule
Not Considering IRC 877(a)(2)(C)
Just because a U.S. Citizen or Long-Term Resident fails the Net Worth or Net Income Tax Liability tests (which is a good thing), does not mean they are out of the woodwork just yet.
The taxpayer also has to show tax compliance for the past 5-years.
If a person has not (correctly) filed their taxes or reported their foreign accounts and assets properly, they are unable to comply with this code section and would be considered a covered expatriate (Read: Take care of this BEFORE expatriating).
Not Taking Step-Up Basis Into Consideration
If a person had certain assets prior to becoming a U.S. person, they may qualify for a step-up of the value.
For example, if Marina had purchased a property for $300,000 before coming to the U.S., which was worth $600,000 on they day she became a U.S. person, the step-up value will not be less than the FMV on that day ($600,000).
Therefore, if the property is worth $800,000 on the date before expatriation, that can have a big impact (including if it was her primary residence).
401K Administrator Notice (30-days or 1st Post-Expatriation Distribution)
You have to give the 401K administrator proper notice, or you lose deferral rights and may have to pay an immediate tax liability in a deemed distribution scenario.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.