An “Expatriate” is a U.S. citizen who relinquishes his citizenship, or a long-term resident (i.e. green card holder for 8 of last 15 years (IRC§877(e)(2)) who ceases to be a lawful permanent resident (IRC§877A(g)(2)).
A “green card holder” will cease to be a lawful permanent resident (i.e. become an expatriate) if the green card is revoked, abandoned, or the individual elects to be treated as a resident of a foreign country under a tax treaty (IRC Sec. 7701(e)(6).
Under the 2008 Tax Act (“HEART ACT”), two new taxes are imposed on “covered expatriates”:
A “Mark-to-Market Tax” (i.e. a “wealth tax” on expatriation); and
A “Succession Tax” (i.e. an “inheritance tax” on gifts, paid by the gift recipient).
An expatriate is classified as a “Covered Expatriate”, if on the date of expatriation, they have:
A net worth of $2m or more (“net worth test”); or
A $157,000 net income tax liability (2014) i.e., an average annual net income tax liability for the preceding 5 years which exceeds $157,000 (“Income Tax Liability Test”), or
Failed to certify (by filing IRS Form 8854) that they have complied with U.S. tax requirements for the 5 preceding tax years (“Certification Test”) (See: IRS Sec. 877(g)(1)(A), 877(a)(2)(A), 877(a)(2)(B), 877(a)(2)(C).
For Covered Expatriates two new taxes are imposed as of the 2008 Tax Act:
1) IRC§877A: A “Mark-to-Market” Tax (i.e. a wealth tax on expatriation). A tax on the net unrealized gain (on the expatriate’s world-wide assets) to the extent it exceeds $651,000 (2012). The net gain on the deemed sale”in excess of $680,000 (2014) is calculated as if such property was sold for its fair market value on the day before the expatriation date (IRC§877A(a)(1)).
2) IRC§2801: A “Succession Tax” (i.e. an inheritance tax on gifts, paid by the gift recipient). This tax applies to gifts to an individual, which exceeds $14,000 (2013) during the calender year, and is assessed at the highest marginal estate or gift tax rate in effect on the date of the transfer (IRC§2801(a)(1). In 2013, a 40% tax rate.
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