Pre-Plan Your U.S. Residency to Avoid or Limit Exit Taxes

Pre-Plan Your U.S. Residency to Avoid or Limit Exit Tax

One of the worst feelings that some U.S. taxpayers face when they are ready to renounce their U.S. citizenship or terminate their green card is that they may become subject to the exit tax. United States exit taxes are a way for the government to require some taxpayers to pay tax on certain growth and other accumulation/earnings that were generated while they had U.S. person status. Typically, there are only two categories of individuals who may become subject to the exit tax: U.S. citizens (born or naturalized) and long-term lawful permanent residents who maintain their green card status in at least eight of the past 15 years.  For Taxpayers who are lawful permanent residents, there are some potential ways to plan to avoid the exit tax before even becoming a U.S. person. Let’s take a brief look at some of the basic concepts for preplanning U.S. residency to avoid the exit tax.

First, Visa Holders Not Subject to Exit Tax

The first, most important component of becoming a visa holder, as opposed to a green card holder, is that no matter how long the taxpayer has their visa, just having a U.S. visa does not result in becoming subject to exit taxes. In other words, the taxpayer can have a visa for 40 years and accumulate tens of millions of dollars and not become subject to the exit tax when they leave the U.S.

*Noting that if the taxpayer starts as a visa holder and then becomes a green card holder and remains one for at least eight years, then they may have a significant tax implication based on the total amount of time they have been in the United States. In other words, step-up, ineligible deferred compensation, etc., may be impacted based on total time as a U.S. person.

Remain a Visa Holder instead of a Green Card Holder

Before obtaining a Green Card, taxpayers should determine whether they plan on staying in the United States permanently or if they have no intention of remaining in the United States for more than 6 months a year and/or for multiple years. If they do not plan on living in the United States permanently or even for at least six months out of the year, they may opt for a B1/B2 tourist visa instead of a green card. Generally, the B1/B2 tourist visa allows the taxpayer to stay in the United States for up to six months each year, and their visa lasts for 10 years. There are other types of visas the taxpayer may consider as well, depending on whether they want to invest in the United States but only live here for a few years, or if they are coming to the United States as a student or other type of research/trainee position.

Green Card Holders for Less than 8 Years

For some taxpayers, obtaining a green card was inevitable for one reason or another. If the taxpayer is a green card holder but has not remained a green card holder in eight of the past 15 years, then they will want to consider terminating their green card before they reach that unfortunate milestone. That is because if they terminate the green cards so that they are not considered green card holder and eight of the past 15 years, then they are not considered a long-term resident for exit tax purposes and will not become subject to the exit tax.

Treaty Elections

Some taxpayers want to retain the green card for employment or other types of purposes, but may be living a significant amount of time overseas. Taxpayers who are living outside of the United States and do not meet the six-month requirement may qualify for a reentry permit in order to keep their green card valid. Depending on the specific facts and circumstances, the taxpayer may also be able to make a treaty election on Form 8833 to be treated as a non-resident alien for U.S. tax purposes even though they have a green card. In most situations, in any year that the taxpayer makes this type of election, it is not counted toward the eight-year threshold for becoming a long-term resident.

Exceptions to Exit Taxes

Some taxpayers who would otherwise become subject to the exit tax may qualify for certain exceptions to not be considered a covered expatriate even though they otherwise would be. The two main exceptions are for dual citizens who live outside of the United States and minors.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.