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| Let’s Talk Taxes – Expatriation Tax |
Asha Dixit
05/09/2013
Let’s Talk Taxes – Expatriation Tax
Survey of the Law of Expatriation, US Department of Justice
Thanks to Facebook co-founder, Eduardo Saverin, the expatriation tax was recently the focus of considerable public attention. Why? Because many, including Senators, were concerned that as a consequence of Mr. Saverin’s renunciation of US citizenship, the taxman lost out. Consider this, even after paying expatriation tax Mr. Saverin’s potential tax savings could be $67 million or more, as reported by Bloomberg News. Eventually what his savings are will be dependent on the share price of Facebook at the time of sale, but the consensus is that it was a smart tax move for Mr. Severin.
Since US has a worldwide tax regime, US citizens and residents are taxed on income from not just their US sources but also from foreign sources. For many US citizens living overseas, with income predominantly from foreign sources, this places significant tax burden.
M is a US citizen but has been living for over 10 years in Saudi Arabia. He has no US source income. M earns $200,000 from working for a Saudi Arabian company. He has several overseas investments from which he earns $85,000 of investment income. M has to file a US tax return with $285,000 of gross income.
As Mr. Serverin’s case demonstrates, expatriation due to tax purposes makes sense for some. However, even taking flight is an option fraught with difficulties. As a consequence of the expatriation tax, for the most affluent US taxpayers, renunciation of citizenship is an expensive proposition. Long term US residents and citizens who renounce their citizenship after June 16, 2008 are subject to an immediate exit tax.
Expatriates who meet either the income tax liability or net worth test are subject to the expatriation tax. In computing the exit tax, a mark-to-market regime must be applied. Under this regime, all the expatriate’s worldwide assets are deemed to have been sold at fair market value on the day before the expatriation date for computing the expatriation tax.
N, whose net worth is $3 million, decides to renounce her citizenship in 2013. Since N decided to expatriate after June 16, 2008, she will be subject to the expatriation tax.
An individual considering expatriation should carefully consider all options. This journey is fraught with complexities; therefore, they should consult with an advisor to understand the ramifications of the expatriation tax and the implications of such a decision.
Disclaimer: Every individual’s tax situation is different and tax situations change over time. This article is intended to give general information to enable the reader to discuss their situation with a tax adviser. It is not intended to be tax or legal advice and should not be construed as such.
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