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Tax Advice for Expatriation: Giving Up Your Green Card or Your U.S. Citizenship Part I

U.S. citizens and green card holders are taxed on their worldwide income. This means it doesn't matter where you live or where you earned the money. As our tax attorneys often point out, if you hold a green card or are a naturalized U.S. citizen (or a citizen by birth) you must pay tax in the United States, you must file Foreign Bank Account Reports (so-called FBARs), and you must file all tax documents with the IRS. Willful failure to do so can result in criminal charges and/or civil tax fraud penalties.

Many U.S. citizens and green card holders are deciding to expatriate to avoid these types of tax problems. I am going to use the term expatriation today to include not only the process of giving up your U.S. citizenship, but also apply it to those individuals who are Green Card holders and decide to terminate that status.

In 2015, according to the Treasury Department, almost 4,300 persons either gave up their U.S. Citizenship or their Green Cards. In 2016, that number jumped to 5,411. A 26% increase over 2015. Some believe that the statistics published by the Treasury Department are understated since they are a bit lower than FBI statistics. Whatever the exact number, many U.S. persons are giving up their U.S. connections for a variety of reasons. Those reasons often include a desire to save on taxes. but it is not that simple.

  • An individual can cease to be a citizen or green card holder under the pertinent provisions of the Immigration and Nationality Act, and yet continue to be a citizen or Green Card holder for tax purposes subject to all of the requirements of the Internal Revenue Code.
  • Exit Tax: A U.S. citizen or long-term U.S. resident who expatriates after June 15, 2016, is deemed for all federal income tax purposes to have sold at fair market value all of his or her worldwide assets in a taxable transaction on the day before the expatriation date if such a person is a "covered expatriate".

Let's try an example:

  • Let's say you receive a parcel of raw land in India as a gift from your grandfather who has never visited the United States. At the time he purchased the property, it was worth $1,000. When he gave it to you it was worth $100,000 and you had not yet moved to the United States. Today, it has grown in value to $1,500,000.
  • Generally speaking, when you receive a gift of property, you receive the same basis as the person who gave you the property. In this case, that would be the original $1,000 he paid. Assuming you are a "covered expatriate," you would pay capital gains tax on the $1,499,000 the imaginary profit (less an exemption amount), even though you haven't sold it!

At this point you may be asking yourself, "if I leave the country, how is the IRS going to collect?" Our next video will hold the answer to this question and more.

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