The death of Tina Turner brought to light a high-profile example of an American who expatriated and how that can affect taxes. Her estate may owe no U.S. estate taxes because she gave up her U.S. citizenship. While many wealthy individuals would love to achieve the same tax savings, expatriation is a drastic step. Ms. Turner’s decision was made after she had already relocated to Switzerland, and presumably was premised upon more than simply financial benefits, however, this was likely a consideration. Regardless of your motivation, before taking that leap, there are several important factors to consider.
Expatriation and Taxes
Expatriation occurs when someone leaves their native country to move to another one. However, under tax laws, expatriation has additional meaning and consequences. A U.S. citizen is free to live elsewhere. However, even those living abroad and holding dual citizenship must pay U.S. taxes. The only way to get out of these taxes is to renounce U.S. citizenship, and expatriate to a new country of permanent citizenship. It should be noted that U.S- based assets may still be subject to taxes, either during your life or upon death, depending upon your circumstances.
Moving to a new country can be expensive. Among the many costs to be factored into expatriation, beyond the obvious relocation expenses, are the taxes of your potential new home country. Income and other taxes can be significant in other countries. They should be compared to U.S. taxes and weighed against the potential savings in estate taxes.
Exit Taxes Owed to the U.S. to Expatriate
U.S. law requires that “covered expatriates,” as defined by the IRS, must pay an exit tax. The exit tax covers unpaid/unfiled taxes owed and assets that are currently owned that have not yet been taxed but would be subject to tax in the future, such as capital gains on stocks. The amount of tax is calculated as of the date of expatriation or renunciation of U.S. citizenship. It is paid on worldwide assets.
“Covered expatriates” subject to the exit tax include:
- US citizens with a net worth greater than $2 million
- US citizens whose average net income tax over the past five years exceeds the threshold amount (as of 2022, the threshold is $178,000)
- US citizens who have not filed tax returns for all previous five years
- Long-term U.S. residents (i.e. green card holders) who have lived lawfully in the U.S. for eight of the last fifteen years.
The exit tax essentially taxes expatriates as if they had died on the date of expatriation, so the government collects both income and estate taxes that would be owed on death. However, an important aspect of the exit tax is that if the expatriate dies in the new country within the 10-year lookback period, the U.S. can collect additional taxes. As a result, if an individual has health issues that may increase the likelihood of death, they should consider the impact of the added taxation.
Taxes Owed in the New Country
Many countries in the world have lower taxes than the U.S. For example, they may only tax income sourced within the country or property located in the country, as opposed to the U.S. which typically taxes all worldwide income. Estate taxes may also be lower outside the U.S. However, the details are important as a country may have taxes that we do not pay in the U.S.
It is crucial to evaluate the full array of taxes that may be imposed in another country, including income, property, sales, VAT, and inheritance taxes.
Emotional and Practical Considerations
Renouncing U.S. citizenship can have a substantial impact on your personal identity, including your feelings of patriotism, and sense of belonging and shared values with U.S. citizens. Friends and family members may also react negatively to your decision.
Citizenship also comes with various rights and privileges. As a result, it is important to consider what rights you will lose in the U.S. and gain in the other country.
The decision to expatriate should not be based solely on the financial impact. While there may be savings on estate taxes, all of the costs and benefits should be weighed before taking that step. It can also help to consult with an estate planning attorney to discuss other options for tax relief that don’t require the drastic measure of expatriation.
If you are interested in a comprehensive evaluation of your estate plan, contact us for a consultation.