When renouncing their U.S. status, U.S. citizens and Green Card Holders may be subject to Exit Tax. In this circumstance, the IRS requires covered expatriates to prepare an exit tax calculation and certify prior years’ foreign income and accounts compliance.

When a person is considering leaving the U.S. permanently, there may be exit tax planning issues to consider.

Exit Tax and Expatriation involve certain key issues. These typically include:

• • Renouncing U.S. Citizenship
  • Relinquishing a Green Card
  • Exit Tax
  • Form 8854
  • Covered Expatriates

FAQs

What is U.S. Exit Tax?

U.S. Exit Tax is the IRS method of making individuals who are considered U.S. Citizens or Long-Term Residents to pay a tax upon “Exiting” or “Expatriating” from the U.S.

Is there a U.S. Exit Tax for Green Card Holders?

Yes. 

How much is the Exit Tax?

The amount of Exit Tax due is based on various factors, depending on the type and source of income, it may be immediately taxable or taxed at a future date, once the income becomes distributed and taxable.

How much is the Expatriation Tax?

Expatriation Tax and Exit Tax are the same.

How is Exit Tax Calculated?

If the taxpayer is a Long-Term Resident or Citizen with no exception, the person must verify if they meet one of the three threshold requirements to be considered a “Covered Expatriate.” 

1. Net income tax liability
2. Net worth
3. Unable to certify tax compliance for five prior years.

Then, the person calculates the exit tax based on each specific asset.

Categories of individuals and their reasons for exit tax planning:

Long-Term Residents

For some people, they may have citizenship in a foreign country but are considered Legal Permanent Residents (aka Green Card Holders) in the United States and were never made aware of the true tax consequences of being considered a US person (especially worldwide taxation).

Accidental Americans

The typical example of an Accidental American is an individual who is required to report and pay taxes to the United States although they do not consider themselves as an ‘American’; but their parents are/were US citizens and they may have been born in the United States or outside of the United States to U.S. Citizen parents.

U.S. Citizens/Green Card Holder Turned “Expat”

US citizens who have simply moved outside of the United States 

As a result, the idea of paying continual US tax seems illogical and therefore leads to renouncing their US citizenship.

Key Exit Tax Planning Tips

The following are a few key tips to keep in mind:

• Avoid becoming a legal permanent resident to prevent being subject to exit and expatriate tax.

• Avoid being a long-term resident by being a legal permanent resident for less than 8 out of 15 years; to be classified as a long-term resident, the individual would need to be considered a LPR for 8 out of 15 years.

• When it comes time to abandon the legal permanent resident status, it must be done voluntarily. 

• Reduce their net worth to below $2 million, they will not meet the first net value test. One way to reduce net worth is by gifting accounts, money, and assets. 

Avoid the 5-Year Trap

Be sure to be in tax compliance for the five years prior to expatriation. If you have been out of compliance and prior years you may consider offshore disclosure to get into compliance and anticipation of expatriation.

If you would like to discuss this further, please contact us.

We would like to remind you that the deadline for filing the FBAR form, also known as FinCEN Form 114, for 2019 is October 15th 2020. Please ensure you submit your form online by this due date. You can complete and file the form at

Click Here

The Department of Treasury has powers to levy significant penalties if you do not meet your obligations to file.

On August 28, the IRS announced that it would temporarily allow the use of digital signatures on certain forms that cannot be filed electronically. The agency added several more forms (PDF) to that list.

The IRS made this decision to help protect the health of taxpayers and tax professionals during the COVID-19 pandemic. The change will help to reduce in-person contact and lessen the risk to taxpayers and tax professionals, allowing both groups to work remotely to timely file forms.

The IRS added the following forms to the list of those being accepted digitally:

• Form 706, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 706-NA, U.S. Estate (and Generation-Skipping Transfer) Tax Return;
• Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return;
• Form 1120-ND, Return for Nuclear Decommissioning Funds and Certain Related Persons;
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.

On 23 July 2020, the Treasury Department and the IRS published final regulations under Section 951A providing guidance with respect to the high-tax exception, which excepts certain ‘high-taxed’ income from being otherwise taxed as “Global Intangible Low-Tax Income” (GILTI). The final regulations maintain the same foreign tax rate threshold to be eligible for a high-taxed income exclusion while simultaneously modifying operational rules that may affect a U.S. individual’s decision to pursue the exclusion. In combination with these final regulations, Treasury and the IRS issued new proposed regulations conforming aspects of the Subpart F high-tax exception with the newly finalized GILTI high-tax exception, and providing for a single high-tax exception election under Section 954(b)(4).

Similar to the Subpart F High-Tax Exception, individual and corporate taxpayers may exclude from GILTI certain high-taxed income earned by a CFC. For this purpose, GILTI is deemed to be high-taxed if it is subject to an effective foreign tax rate in excess of 90% of the maximum U.S. corporate income tax rate. With a current U.S. corporate income tax rate of 21%, this equates to an 18.9% threshold for high-taxed income.

As compared to the proposed regulations, the final regulations offer more flexibility by allowing U.S. shareholders to elect into the high-tax exception on an annual basis. Generally, this applies for tax years beginning on or after July 23, 2020. This permits taxpayers to apply the election retroactively to any CFC tax year beginning after December 31, 2017, if they apply the final regulations consistently to each year for which the election is made.

U.S. individuals with interests in CFCs should discuss these changes with their U.S. tax advisors to better understand how to optimise the tax efficiency of their structures under these new regulations.

Taxpayers are now required to report and pay CGT within 30 days for gains arising on UK residential properties. All disposals of UK real property made on and after 6 April 2020 by UK resident and UK non-residents must be reported through the new CGT on UK property account, which is separate to their personal tax account. The old NRCGT form can now only be used for disposals made prior to 6 April 2020.

HMRC has confirmed that it has fixed an issue with verification that was preventing some taxpayers (particularly overseas taxpayers) from setting up a Government Gateway account in order to access the CGT on UK property account.

Chancellor of the Exchequer, Rishi Sunak, was due to deliver the next Budget in autumn. However, the Treasury have recently announced that the Autumn Budget will be scrapped this year because of the coronavirus pandemic. After borrowing and spending billions on the COVID-19 response so far, the Chancellor was reportedly considering different ways for this money to be clawed back. According to reports, a few of the areas that were going to be looked at were raising capital gains tax and corporation tax.

Mr Sunak has previously said some taxes will need to rise over the medium term. The reported tax increases under consideration included a sharp jump in corporation tax – reports suggested increasing corporation tax from 19% to 24% to increase revenue. Additionally, it was also suggested that capital gains tax might also be paid at the same rate as income tax to increase revenue.

The Chancellor has however insisted that a “horror show of tax rises” were not on the horizon. Mr Sunak said that while the Government “will need to do some difficult things” in an effort to “overcome short-term challenges”, this did not mean “a horror show of tax rises with no end in sight.” Mr Sunak also said that ministers will need to be honest with the public about the challenges ahead and show them how the Government plans to “correct our public finances and give our country the dynamic, low-tax economy we all want to see.”

Despite there being no Autumn Budget this year, there will be a spending review to set out the overall shape of government spending. Typically, the government outlines the state of the country’s finances in the Budget and, crucially, proposes tax changes. But any such decisions will now be put on hold until next year. Instead, the government will reveal how much each department is allowed to spend.

This could mean that the proposed tax changes are now just delayed. It is worthwhile taking these potential proposed changes into account during this period of ongoing uncertainty.

Please do not hesitate to contact us if you wish to discuss any of the matters above.

A number of taxpayers have received letters from HMRC recently outlining that HMRC has information about their offshore income and gains. These letters seem to be different to previous letters which seemed to be ‘fishing expeditions’.

The latest version of the letter confirms that HMRC compared the information received under information exchange agreements with other countries, to the individual’s tax record and tax returns, before sending the letter. This indicates that the letter is not speculative. HMRC is taking a risk-based approach and is only contacting taxpayers where it is unable to reconcile the figures received under information exchange agreements to tax records and tax returns.

All the letters include a “certificate of tax position” form which HMRC asks the individual to complete and return whether they have additional tax liabilities to disclose or not. This is to encourage a response from the individual. HMRC generally gives 30 days from the date of the letter to respond.

If you have received such a letter, you should consider your position very carefully and the subsequent action that should be taken, especially whether the ‘certificate of tax position’ should be signed and returned. Frontier can of course assist with this matter, if you have received such a letter.

The IRS issued its annual inflation adjustment for health savings accounts for 2021, at a time when many taxpayers are worried about their health in the midst of the coronavirus pandemic.

In Revenue Procedure 2020-32, the IRS stated that for calendar year 2021, the annual limitation on deductions for an individual with self-only coverage under a high deductible health plan is $3,600 (increase from $3,550 the previous year). For 2021, the annual limitation on deductions for an individual with family coverage under a high deductible health plan is $7,200 (increase from $7,100 the previous year).

A “high deductible health plan” is defined as a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses do not exceed $7,000 for self-only coverage or $14,000 for family coverage.

The IRS announced in March that high-deductible health plans can now cover the cost of COVID-19 testing and treatment before the plan deductible is met.

As part of the CARES Act signed into law at the end of March, Congress is also now allowing people to use the HSA to pay for over-the counter drugs and medicine, such as pain relievers, without a doctor’s prescription. This essentially reverses a provision of the Affordable Care Act that required a prescription for such purchases. The CARES Act also allows the use of HSA’s for remote care services until 31st December 2021.

This summer for the first time, taxpayers will be able to electronically file their Form 1040-X, “Amended U.S. Individual Income Tax Return.” Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years, adding that it’s also been an ongoing request from the tax professional community and a continuing recommendation from the Internal Revenue Service Advisory Council and the Electronic Tax Administration Advisory Committee.

About 3 million Forms 1040-X are filed each year. Currently, taxpayers must mail a completed 1040-X to the IRS for processing. For now, only tax year 2019 Forms 1040 and 1040-SR returns will be able to be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X.

The US treasury department has now released proposed regulations in relation to changes to Like-Kind exchanges.

In Summary TCJA amended Section 1031 to limit its application to exchanges of real property. Deferral under section 1031, however, is not allowed for an exchange of real property held primarily for sale.

The proposed regulations add a definition for real property and address the receipt of personal property that is incidental to the real property exchange.

In the past the like-exchange rules applied to artwork and other collectibles for example.