The decision to expatriate is life altering and should only be made after carefully considering both the quantitative and qualitative factors and after consultation with an experienced tax attorney. The following information is intended to provide you with a general outline of the requirements for expatriation as well as the potential impact of the Exit Tax. There are other considerations including the political risk associated with living in a foreign country, potential barriers to re-entry to the U.S. in the event of a political instability, cultural differences, language barriers, the potential infringement of civil or human rights and many others. The message is walk slowly.

In general, the act of expatriation is considered the act of withdrawing oneself from residence from one’s native country. For federal income tax purposes the act of expatriation is a broader concept and depends upon the individual’s legal status as well as his or her date of expatriation. Technically, a U.S. citizen expatriates through the process of renunciation while a long term resident ceases being a long term resident based upon certain events. For purposes of this discussion, we will use the term “Expatriate” to include both U.S. citizens as well as long term residents.

The Covered Expatriate is subject to income tax on the net unrealized gain from the sale ofthe individual’s property. The total amount of gainis reduced by an exclusion amount which is adjusted for inflation. (The following exclusions apply: $690,000 for 2015; $693,000 for 2016). The net gain, after allowance for the exclusion,is subject to income tax at the capital gains rates. The capital gains rate will vary depending upon the individual’s federal income tax bracket. Individuals in the 10% or 15% tax bracket pay nothing. Those in the 25% and 35% tax brackets will pay a capital gains rate of 15. Finally, those in the highest bracket of 39.6% will pay a capital gains rate of 20%. In addition single filers earning more than $200,000 and joint filers earning more than $250,000 may also have to pay an additional 3.8 “Net Investment Income Tax.”

To illustrate how the Exit Tax works,consider the following example.

John Howard is age 54. John is a famous Philadelphia criminal attorney and long term Clinton supporter. John is disgusted with the election results and simply cannot stand the thought of a Trump Presidency, much less a Republican majority in the House and Senate. John decides to renounce his U.S. Citizenship and move to Kenya, where he has accepted a position as an adjunct professor of law at the University of Nairobi, College of Law. John is married to a Kenyan national and previously secured permanent resident status.

John has done extremely well in the stock market, having amassed a portfolio valued at $82 million. In addition, John owns a condominium in downtown Philadelphia, a mountain home in the Poconos and rare collection of Native American artifacts. John also owns a collection of vintage motorcycles including a 1948 Indian Chief, a 1943 Harley Davidson “Knucklehead” and a 1952 Harley “Panhead.” Finally, in 2013 John inherited the family ranch in Chama, New Mexico consisting of 3,000 acres of pasture land, a main and guest house, 2 barns,servants’ quarters and 300 head of cattle. The fair market value of the Chama Ranch at the time of his mother’s death was $8,420,000.

Without first consulting with a tax attorney, on November 13, 2016 Johnrenounces his U.S. citizenship.The fair market value of John’s assets, tax basis and tentative gain are as follows:

John is in the highest tax bracket of 39.6%. As such, he will be taxed at a capital gains rate of 20% and will also be subject to the 3.8% net investment income tax. As the following calculation demonstrates, leaving the country may not be such a great idea. Perhaps those in the entertainment industry are on to something!

If you expatriate in 2015 or later, it may be possible defer payment of the mark to market tax on any property deemed to have been sold. The deferral is on a property by property basis. Taxpayers interested in deferring the tax are required to enter into a tax deferral agreement with the IRS. In addition, the taxpayer must furnish security in the form of a bond or letter of credit acceptable to the IRS that will cover the assessed tax plus accrued interest. The rationale behind securing the payment of the tax debt with a bond or letter of credit has to do with leverage and the potential risk that the expatriate might skip out without paying.

A U.S. citizen or long term resident, who successfully expatriates is no longer subject to U.S. income tax on the expatriate’s worldwide income and no longer required to file a U.S. tax return. But not so fast! A former citizen or long term resident of the United States is still subject to U.S. tax on any income derived from U.S. sources including income from any U.S. trade or business as well as income derived from investment such as stock, bonds, real estate, etc. The expatriate may also be subject to withholding on any U.S. income and required to file 1040NR. Finally, an expatriate may be required to file certain financial reports with respect to any ownership interest in a U.S. entity.

Just ask Dan Horsky, who on November 4, 2016 pleaded guilty to conspiracy to defraud the United States and submitting a false expatriation statement in 2014. According to documents filed with the court, Horsky, age 71 is a U.S. citizen and also a citizen of the United Kingdom and Israel. Horsky was employed by a Rochester, New York University as an emeritus professor of business administration for over 30 years. From 1995, the defendant engaged in a pattern of nefarious activity which included investing in startup companies by using funds from unreported foreign financial accounts, creating a foreign nominee entity for the sole purpose of holding title to the shares in his investments and setting up a foreign bank account in the name of a nominee entity in order to conceal his financial transactions and financial accounts from the IRS. As part of the scheme Horsky failed to report substantial income received from his offshore investments. Details of the conviction can be found at:
https://www.justice.gov/opa/pr/emeritus-professor-pleads-guilty-conspiring-defraud-united-states-and-submitting-false

While the Horsky case deals with a false certification in the context of the failure to report foreign income and foreign financial assets, the concept of falsifying Form 8854 with respect to domestic assets equally applies. The other takeaway here is that the IRS will hunt down an expatriate, no matter how remote the location, if the expatriate submits a false Form 8854 and the IRS subsequently finds out.

In conclusion, any decision to leave the United States permanently should not be made without carefully considering the tax implications and without speaking with a tax attorney. Other factors, such as political risk of expatriating to a foreign country, cultural differences, language fluency, and barriers to reentry to the U.S. in the event of political upheaval should also be considered. Finally, given the political uncertainty with respect to the future enforcement of the U.S. immigration laws, an expatriate should consider the possibility that he or she may not be able to get back into the United States, even on a travel visa, if it doesn’t work out.It might not be a bad idea to first rent, before buying the farm.