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Moving North? Consider Tax Consequences

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During every presidential election cycle, there are citizens who, fearing the direction the country is heading, begin researching the steps to move to another country. This election in particular, countless people (including many celebrities like Whoopi Goldberg, Amy Schumer, John Stewart and more), publicly vowed to leave the country if their candidate lost.

Adding fuel to the expatriate fire, on election night, the Canadian immigration website crashed twice. But before learning the words to “O Canada,” potential expatriates should consider some of the tax consequences of renouncing their United States citizenship.

The Exit Tax

Individuals who are deemed Covered Expatriates, anyone with a net worth of more than $2 million, and/or more than an average of $165,000 in net federal income tax liabilities over the last five years (based on the total value of the returns for each individual regardless of whether s/he filed jointly or separately), are subject to a deemed disposition (or exit) tax.

This tax is determined by assuming that property interests were sold at market value the day before expatriation. These “sales” (and their phantom capital gains) must be reported on the relevant forms and schedules of Form 1040. The following example will demonstrate how the deemed disposition tax works.

Bill has an investment portfolio currently valued at $800,000, but his basis (i.e., purchase price) is only $300,000. Because Bill is considered, for other reasons, as a Covered Expatriate, when Bill leaves the country and renounces his citizenship, he will owe taxes for $500,000 in gains, giving him a tax bill of around $85,500 —regardless of whether he actually sells the investment portfolio.

Gift, Estate Taxes

In addition to the deemed disposition tax, renunciation also carries adverse gift and estate tax consequences. Gifts or bequests from Covered Expatriates to U.S. residents are, after any available exemptions or exclusions, subject to the highest gift and estate tax marginal brackets, currently a rate of 40%. On the bright side, in most cases there is no gift tax applied to transfers of intangible property (e.g. stocks) by non-residents who are not citizens of the United States.

The Bottom Line

The aforementioned tax complications may be why many of the celebrities who vowed to leave the U.S. have since gotten cold feet. Taxes aside, failing to update one’s estate planning documents upon moving to another state, much less another country, could pave the way for nightmarish legal and medical consequences as well.

Despite the pitfalls, the quagmire of expatriation can be navigated successfully with help from trusted and qualified professionals. If you are considering expatriation, the bottom line is that it is a complicated process and mistakes can be costly and irreversible.

Christopher Martin and Gary Altman are attorneys at the estate planning law firm Altman & Associates. The firm has locations in Columbia, as well as Rockville, Washington, D.C., and Tysons Corner, Va. They can be reached via www.altmanassociates.net.