Dianne C. Mehany spoke with Law360 to discuss tax tips for U.S. expatriates and their advisors. In 2013, the U.S. saw the largest number of expatriations in history. The trend is fueled by individuals with tax evasion motives and those frustrated by the expensive and time-consuming process of filing annual U.S. tax returns. With the implementation of the Foreign Account Tax Compliance Act (FATCA), which requires foreign banks to report tax information about U.S. account holders to U.S. or foreign governments, the process will only become more costly and complex. For the full article, please click on the above link.
Excerpt taken from the article.
"You have to have an alternate citizenship," said Dianne Mehany, a Caplin & Drysdale Chtd. associate who focuses on international tax planning. "There are some clients who think you can be stateless, and that's not right."
Mehany added that an individual whose net worth is less than $2 million is an ideal candidate for expatriation, since such a person will miss the income threshold that would otherwise obligate them to pay an expatriation tax to the IRS.
On the other hand, high-wealth individuals whose assets are mainly rooted in the U.S. or whose children intend to stay in the U.S. should probably reconsider expatriation, since they will have to pay taxes on their U.S.-source income and their children will pay estate taxes, according to Mehany.
"At the end of the day, the U.S. will get their money," she said.
Determine If Your Client Is a Covered Expatriate
The Internal Revenue Service requires certain individuals — known as covered expatriates — to pay an expatriation tax before they leave the country. The tax applies to U.S. citizens whose net worth is $2 million or higher on the date of their expatriation, as well as individuals who had to pay an average $155,000 income tax for the five years preceding their expatriation. It also applies to individuals who fail to certify that they complied with their U.S. federal tax obligations for a five-year period before expatriation.
"The design is that you were a U.S. citizen when you made your millions, you enjoyed the benefits of citizenship, and now you should share that," Mehany said of the reasoning behind the exit tax.
Generally, expatriate candidates with U.S. tax debt have to pay penalties on the money they owe — unless they qualify for a new IRS review that eliminates penalties for low-risk taxpayers who have been living abroad since 2009 and haven't paid U.S. income taxes since then, according to Mehany.