I have heard people say that, if Donald Trump runs and wins in 2024, they will leave the country, but not many actually understand what leaving the U.S., and giving up U.S. citizenship, entails. It can be done, and is easier since 2008 when the Heroes Earnings Assistance and Relief (HEART) Act passed. It is, however, an expensive process for those who have any significant amount of wealth, as the IRS wants to get its cut of the estate taxes that you would otherwise have paid if you had remained a U.S. citizen or resident. Here is a brief summary.
Covered Expatriates
The law covers people who leave and are either 1) U.S. citizens or 2) long-term permanent residents who have held green cards for eight of the past 15 years and give up their green card. Both are subject to an immediate "exit tax" on unrealized gains on their assets, both in the U.S. and worldwide, including grantor trusts and future gifts to U.S. citizens and residents. You qualify as a covered expatriate if you meet any of the following criteria:
- You have a net worth of $2 million or more, including all property that is subject to a gift tax and all property you hold a right to use or benefit from.
- You have an average income tax liability of more than $139,000 over the five years prior to leaving, indexed for inflation.
- You fail to certify that you have complied with all U.S. federal tax obligations for the preceding five years.
Exemption
People who are dual citizens from birth and who have not lived in the U.S. for more than 10 of the past 15 years and people who are under the age of 18 1/2 and have not lived in the U.S. for the past 10 years are exempt.
Mark-to-Market
The amount of the unrealized gains on assets to which the exit tax is applied is determined by the "mark-to-market" basis. This means that the assets are valued as if they had been sold at fair market value on the day before the exit event. It includes any interest that would have been included in the gross estate for estate tax purposes. The first $600,000 of the calculated gains is exempt ($713,000 adjusted for inflation to 2019). This exempt amount is allocated pro rata across all of the assets. Any gain over this amount is subject to U.S. income tax. The tax payment is due 90 days after giving up U.S. citizenship, and it is considered effective even if you do not file the 8854 Initial and Annual Expatriation Statement.
Exceptions
The exceptions to the mark-to-market rule are a few certain deferred compensation items, specified tax-deferred accounts and nongrantor trusts (including offshore trusts). For the rest, such as IRAs, tuition programs, 529 accounts, health savings accounts, and so on, the entire amount is subject to immediate income tax. Once paid, no further tax is due on withdrawals on those accounts.
Thirty Percent Withholding on Retirement Plans
Deferred compensation plan assets are subject to a 30% withholding at the time of the event and are subject to a 30% withholding when the assets are paid out to a nonresident alien, resulting in up to a 51% tax on retirement accounts.
Future Gifts and Bequests
As a covered expatriate, if you make a gift in excess of $15,000 a year (in 2019) the recipient (including trusts) must withhold tax at the highest marginal rate for gift or estate tax in effect at that time, with no regular allowances as are allowed for U.S. persons for unified credits, etc. The gift is tax-exempt if to a U.S. spouse or a U.S. public charity.
Procedure
To give up U.S. citizenship, you should:
- Open a bank and investment account with a bank or investment firm that has no U.S. connections;
- Get a citizenship in another country;
- Leave the U.S.;
- Appear before a U.S. consul in that country and renounce your U.S. citizenship;
- Transfer assets into the non-U.S. bank or investment company;
- File form 8854 Initial and Annual Expatriation Statement; and
- Pay the tax when due.
Conclusion
Leaving the U.S. and giving up your U.S. citizenship is possible, but it is complicated and costly. For some people it may be a better option than waiting around until either Trump starts his second term or Elizabeth Warren enacts her 5% annual confiscation of private wealth. Either way, you should not do so without a great deal of planning.