How the US Exit Tax Works when Expatriating

if you're planning on renouncing US citizenship you need to be aware of the exit tax that applies to American expatriates this is the IRS is last bite at the Apple on your worldwide assets and so it's important to be prepared and in this video I'm going to share with you all of the details that you need to know about the exit tax for American expatriates [Music] hey guys I'm Andrew Henderson if you want to learn how Nomad capitalists help 7 and 8-figure entrepreneurs legally go offshore learn more at nomad capitalists calm today I want to talk about the u.s. exit tax on American expatriates and by expatriate I don't mean an expat who simply goes and lives in another country I mean someone who as I did renounces their citizenship permanently they'll no longer be a US citizen and what that does is that triggers the IRS coming in taking a look at their worldwide assets and potentially applying a one-time tax now other countries do apply this tax we've made videos about other countries that when you leave and become a non-resident they will potentially apply an exit tax the u.s. because they're the only country effectively that taxes citizens based on their citizenship and that based on their residents it works a little bit differently I think this is especially kosher right now because in the news recently has been the Russian billionaire Oleg Tinkoff he renounced his citizenship and now the US government is after him because they allege he did not fill out the form 8850 for the expatriation tax return that you file with your final return they said he did that incorrectly and there's a whole you know battle going on if you want to hear my comments on that case leave a comment below and I'll consider making a video now who has to be concerned about the exit tax there are three tests okay and if you pass any of these three tests or fail depending on how you look at it you are what is called a covered expatriate we'll talk about that in a moment the three tests are number one at the time of expatriation a day before expatriation do you have a net worth of two million dollars or more now there's some confusion here sometimes people think oh this is only my US assets if I have a foreign company or if I have real estate overseas that doesn't count incorrect because the US government taxes your worldwide income and worldwide assets this is their chance to tax everything you own everywhere in the world so simply moving a bunch of your money overseas and buying a real estate or doing whatever else with it that's not gonna solve your problem they want to know your worldwide assets two million dollars or more you triggered the test the second test is tax liability in 2019 the number was a hundred and sixty eight thousand dollars if the aggregate federal tax liability averaged that over the last five years was a hundred and sixty eight thousand dollars a year then you are also are covered expatriate we're talking federal tax here so I went to public school 168 thousand times five eight hundred and forty thousand dollars that you can have over the last five years and so if you trigger that then you would also be be liable even if you don't have much money okay so if you're a high income employee or you run a business and without a lot of value but you just you make money and you pay tax then you trigger it the third trigger is if you are not in tax compliance so if when you expatriates different arguments and exactly when this needs to be done but if you're not in tax compliance then you will also trigger the test this is a big one for the so called accidental Americans people who were born in the United States two foreign parents they never really lived in the United States but by virtue of merely being born in the country they are US citizens and because this concept is so foreign to many folks you know they think hey I've been living in you know Germany my entire life since age one I work in Germany I pay taxes in Germany you know why would I be liable to the US you know what would that matter right well it does matter and so those folks often don't take the net worth threshold often don't take the federal income tax threshold particularly if you're living in paying tax overseas and you benefit from a credit or from a treaty you wouldn't have any tax liability in the US at all but what you may have is a situation where you haven't filed your taxes correctly because you didn't know you had to and so you know there's numerous ways to deal with these strategies you know something that we do with folks that we work with we're not gonna get into every different permutation here but obviously there are different ways to to get into tax compliance there are different ways by the way if you if you're an American doing business overseas and you've got a foreign company you know and you didn't know you'd be file for that or if you have foreign bank accounts and you didn't know need to report those we had some folks a couple years ago who had been living overseas and legally in paying tax there they didn't know they had to file an F bar in the US you know they were not tax compliant so there are strategies to get yourself in compliance there are strategies to deal with the income there are strategies to deal with a net worth depends on a lot of factors but those are the ways that you can trigger what's called covered expatriate status if you trigger covered expatriate status you were now subject to the exit tax and they going to look at all your assets now you've got to declare these assets when you expatriates tax return on Form eighty eight fifty four and so you have to self assess these but you know you want to have sub valuations behind it and this is what happened in the case of mr. tinker they said well you know this guy was really SuperDuper aggressive in his valuations I don't know if that's true but that is the claim that's been made in the media and so you go through and value are these assets and obviously you know cash is worth cash whether it's in the US dollars or foreign currency spot rate of the day before expatriation that's pretty simple real estate depends where it is depends what kind of real estate it is you know companies these can be hard things to value you know there are processes to value these these assets and so if you trigger the test basically what they're gonna do is they're gonna sell your assets you're not gonna really sell them but they're going to act as if you sold them on that day before you expect read it and they're going to basically tax you on the difference between the mark-to-market value and the basis of those assets so let's say you started a company with zero and now the company has you know a hundred thousand dollars in the bank well I mean again there's some different strategies with that but I think that you know it's worth a hundred thousand dollars right you know if you've got half a million dollars in a bank accounts worth half a million dollars if you have gold ok what's the price of gold today it's worth gold and so if you bought gold for you know a thousand dollars an ounce and you sold it for eleven hundred dollars announced and hundred dollars an ounce times X number of ounces and that's the capital gains text normal capital gains tax treatment you get seven hundred and twenty five thousand dollar exclusion in the year 2019 that number just like the federal income tax number goes up generally every year the IRS puts out those instructions and so that seven hundred twenty five thousand in gains comes up the top if you have a cash flow business if you have stocks and you know have run up a lot of the know through the last ten years like people have stock gains they have gains in real estate those all get added up and you can get seven hundred and twenty five off of it but a lot of folks are gonna end up paying something at this normal capital gains tax rates now because you're a covered expatriate and because you triggered the exit tax does not necessarily need mean that you need to pay I had a gentleman a while ago he sold a business for tens of millions of dollars businesses in the US he sold it as a US citizen he lived in the u.s. at the time he paid full boat all the taxes were paid now he had fifty million bucks or whatever it was you know sitting in a bank account and in different investments okay he would be a covered expatriate but they're not going to tax you again okay if the fifty million dollars is just sitting in cash it's it's theoretically possible there's no tags do you just trigger the status now what happens if you trigger the status well theoretically they're supposed to put your name and the Federal Register as people have renounced US citizenship on a quarterly basis that there's notoriously inaccurate we see people who were in the register who were not covered expatriates these people who aren't in there who are covered expatriates so you know chalk it up to to government inefficiency but you're supposed to go on the list the kind of the name and shame list who knows what could happen in the future you know if you can avoid being a covered expatriate probably a good thing I've had a lot of people come to me and they are younger people who are starting out in business but they're going you know very quickly and they're growing very quickly and maybe they have a million or a million-and-a-half dollars you know sometimes it's it's closer to two million and it's like okay now is a good time to make a decision do you want to expatriates it's only gonna get harder from here not only will you over the tax there's a possibility this is just my speculation there's a pause ability that if you look at what Chuck Schumer wanted to do after Eduardo Saverin of Facebook renounced Chuck Schumer said we're gonna make it so that if you renounced you can never come back to me that seems difficult because you had a very unworkable provision called the Reid amendment which I think maybe was used once in 25 years to deem someone inadmissible to come back into the United States and the basis of renouncing for tax purposes is it theoretically possible that in the future they say okay if you're in a covered expatriate we're just going to assume it was for tax reasons that could be a future law and you can't come back to the United States that would be more workable to me than you know penalizing everybody who has been living in Amsterdam since they were 6 months old as an accidental American and renounced and they just want to come back and take their family to Disney World is you know that's the politics that the Western world is going through right now is you know punish the evil rich and so I think having this status that it's kind of like you know wearing the evil rich tag on your sleeve you know you're a covered expatriate you have multi millions of dollars you're a multimillionaire maybe that's something to do in the future and so if you can avoid that status I would recommend it so there's an overview of how the exit tax works you want to do proper planning and so there are you know things that you can do we work with a lot of international tax attorneys and tax accountants and coordinate you know global plans for folks who plan to renounce I've been through it I can tell you there's a lot to think about and you want to get your ducks in a row because the last thing you want to do is not have the right numbers the last thing you want to do is not be filing the forms you can get in big trouble for doing that if you don't file the form in your renown so they can come down on you like a ton of bricks also and and take a bunch of money so you want to be organized if you're planning on renouncing you need a plan you need a plan for what happens to your banking to your businesses to your investments and what happens to the tax when you leave how can nomad capitalists help you four ways number one subscribe to our 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Channel: Nomad Capitalist

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Keywords: renounce citizenship permanently, exit tax, US exit tax on American expatriates, US exit tax, renouncing US citizenship, form 8850, expatriation tax return, US government, worldwide assets, one-time tax, covered expatriate status, renouncing us citizenship, renouncing us citizenship taxes, renouncing american citizenship, us citizenship renunciation, expatriation usa, us tax system, us renounce citizenship, us citizenship taxes, giving up us citizenship, expatriation

Id: Cbg3aQwTkjQ

Length: 12min 19sec (739 seconds)

Published: Thu Jun 04 2020