Expatriation Tax Definition

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Expatriation Tax Definition

What Is an Expatriation Tax?

An expatriation tax is a government cost levied on people who renounce their citizenship, generally depending on the value of their property. In the United States, the expatriation tax provisions of the Internal Revenue Code (IRC) Sections 877 and 877A apply to U.S. citizens who give up their citizenship and long-term residents who relinquish their U.S. resident status for federal tax reasons. Different regulations apply depending on when a person was expelled.

Key Takeaways

  • An expatriation tax is a government cost levied on people who renounce their citizenship, generally depending on the value of their property.
  • In the United States, the expatriation tax provisions of the Internal Revenue Code (IRC) Sections 877 and 877A apply to U.S. citizens who give up their citizenship and long-term residents who relinquish their U.S. resident status for federal tax reasons.
  • Expatriation tax regulations in the United States apply to individuals who moved overseas permanently on or after June 17, 2008.

Understanding the Expatriation Tax

Expatriation tax regulations in the United States apply to individuals who moved overseas permanently on or after June 17, 2008. These laws apply to anybody who expatriates with a net worth of more than $2 million, fails to verify that they have complied with US tax law for the five years before their expatriation, or has an annual net income tax of more than a specific amount for the five previous years. This figure fluctuates dependent on inflation, but it was $171,000 in 2020.

Expatriation taxes are not widely used over the globe. Only the United States and Eritrea levy income taxes on residents who relocate overseas. Some other nations, such as Canada, levy a departure tax on persons who emigrate to other countries, which is distinct from an expatriation tax.

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The value of an individual taxpayer’s property on the day of their expatriation is used to calculate the expatriation tax in the United States. The IRS considers the fair-market value of taxpayers’ property as if the taxpayers liquidated their assets and sold all of their property on this day. A net gain under the tax is the difference between the fair market value and what a single taxpayer paid for a property. Similarly, any losses are calculated using the same way. Any gain exceeding $737,000 (2020 maximum), which is updated for inflation on a regular basis, is taxable.

Because many expatriates do so to dodge tax regulations affecting their assets, the IRS imposes harsher tax consequences on expatriates. Individuals who demonstrate to the Secretary of the Treasury that their motivation for expatriation is not to dodge taxes, such as a dual citizen deciding to make another nation their permanent home, are exempt from the expatriation tax.

The IRS continues to penalize anybody who fails to submit an expatriation paperwork on time. Form 8854 must be completed by covered expatriates. People who do not submit this form as required are in violation and might face a $10,000 penalty, according to the IRS.

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