Each year, several thousand individuals renounce their U.S. citizenship or give up their green cards, which can trigger a substantial exit tax liability. Individuals who have expatriated or are considering expatriating should be aware that the IRS appears to be sharpening its enforcement efforts in these situations.
Expatriation Tax - Heroes Earnings Assistance and Relief Tax Act of 2008
The current expatriation tax was introduced in June 2008 as part of the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), P.L. 110-245. The HEART Act added Sec. 877A and certain other related provisions to the Internal Revenue Code.
The Sec. 877A expatriation tax generally applies to any U.S. citizen who relinquishes citizenship and any long-term resident (an individual who has held a U.S. green card in at least eight of the prior 15 years) who terminates green card status, if the individual meets any one or more of the following criteria:
Average annual net income tax liability over the five years ending before the date of expatriation is greater than $201,000 (for expatriations occurring in 2024 — indexed annually for inflation);
Net worth of $2 million or more on the date of expatriation; or
Failure to certify their compliance with the U.S. tax laws for the five preceding tax years or failure to submit evidence of their compliance as required by the IRS.
If an individual is determined to be a covered expatriate, their worldwide property is considered to have been sold for its fair market value on the day before the individual’s expatriation. The resulting gain from this “mark to market” transaction is subject to tax to the extent it exceeds an exclusion amount of $866,000 (for expatriations occurring in 2024 — indexed annually for inflation).
Certain assets, including deferred compensation items, specified tax-deferred accounts, and interests in nongrantor trusts, are excluded from the mark-to-market rule and are subject instead to special tax rules.
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