Renouncing U.S. citizenship is a significant decision with wide-ranging implications.\u00a0 Renunciation may have adverse U.S. tax implications. This blog will break down the tax complexities surrounding the renunciation process and provide you with an essential understanding without getting lost in the jargon.<\/p>\n\n\n\n
Who is a Covered Expatriate?<\/strong><\/p>\n\n\n\n A covered expatriate includes individuals who renounce their U.S. citizenship or abandon their green-card and are classified as long-term residents if they meet one of the following tests:<\/p>\n\n\n\n The following exceptions to covered expatriate status may apply:<\/p>\n\n\n\n U.S. Exit Tax<\/strong><\/p>\n\n\n\n Covered expatriates are subject to U.S. Exit Tax as detailed below:<\/p>\n\n\n\n Deemed Sale of Worldwide Assets<\/em><\/p>\n\n\n\n This tax is imposed on the net gain of the deemed sale of worldwide assets at the fair market value on the day before renunciation of U.S. citizenship. An exemption of US$821,000 (2023) may reduce or eliminate the taxable gain. The gain after exemption is taxed at rates up to 20%. Exemptions, such as on the sale of a principal residence, are not available to reduce this tax This tax may be deferred, but it is subject to an interest charge. Individuals abandoning their green-card may reduce their taxable gain by using the fair market value of their assets at the date they obtained that status. <\/p>\n\n\n\n Deferred Compensation<\/em><\/p>\n\n\n\n Pension, retirement plans and other deferred compensation plans are subject to U.S. Exit Tax. An individual is deemed to receive all deferred compensation on the day before renunciation of U.S. citizenship. There is a 30% U.S. withholding tax, though tax treaty relief may apply. Eligible deferred compensation is taxed when it is received.<\/p>\n\n\n\n Individual retirement plans and other \u201cspecified tax deferred accounts\u201d under U.S. tax law are treated similar to deferred compensation.<\/p>\n\n\n\n Non-Grantor Trusts<\/em><\/p>\n\n\n\n Covered expatriates who are beneficiaries of non-grantor trusts are subject to a 30% U.S. withholding tax on distributions, less if provided by a tax treaty and pursuant to IRS agreement, and the deemed disposition rules noted above where the fair market value of the trust\u2019s assets exceeds its U.S. tax basis. A beneficiary of a discretionary non-grantor trust may be subject to this provision even where he or she cannot compel payments to them.<\/p>\n\n\n\n\n
\n
\n