An Overview of the US Exit Tax: The Transcript

An Overview of the US Exit Tax: The Transcript

Did you miss our webinar on the US exit tax and its implications for American nationals looking to give up their US passport?

Well, the full transcript is now available for your reading pleasure.


If you have any follow-up questions on the US exit tax, please feel free to submit them on the pertinent forum thread linked to below. John Richardson would be happy to answer any additional questions you might have.


We also want to take this opportunity to thank John for participating and shedding plenty of light on the US exit tax.

Stay tuned for future webinars with John on other tax-related issues afflicting Americans living abroad. Coming up some time in February or March will be a discussion on the recent tax reform’s GILTI provisions.

Here are some of this enthralling webinar’s main highlights!

Which people renouncing their US citizenship are subject to the exit tax?

John Richardson, a Toronto-based lawyer with Citizenship SolutionsJohn Richardson: “People who are subject to the exit taxes are people who are defined in the Internal Revenue Code as covered expatriates. A covered expatriate is a person who triggers one of these three wires. The first would be that that person has had an average US tax liability of, I believe, $165,000 per year over the last five years… The second test is based on assets… One would expect a very high asset level triggered the exit tax. Wrong, wrong, wrong. The figure is 2 million US dollars—assets less liabilities… Third, you have to also certify that you were compliant with the obligations imposed by Title 26, which is the Internal Revenue Code of US Law for the five years prior to expatriation. And that includes paying all taxes, completing all forms, etcetera. And this is a very big problem for people because nobody understands US taxes very well.”

Is the exit tax really a collection of four separate taxes? How do these separate taxes work?

John Richardson: “The first tax is what I would call the gain from disposition of property tax. It's treated like a capital gain. So if you had a piece of real estate and you sold it, you would pay a capital gains tax on that. So for property, things like real estate shares, etcetera, you expatriate, and if you're a covered expatriate, they would pretend that you had sold all your capital property and impose a pretend tax on the pretend sale.”

“[The second] are what are called specified tax deferred accounts. These are things like IRAs, that sort of stuff. And the theory there is that, at least for certain types of these things, you get a tax deduction when you contribute to them. So the idea is that it's essentially a payback, if you will, deductions that you had earlier plus the accrued gains. But anyway the problem there with that type of thing is the full income inclusion. Very dangerous. Imagine a million dollar specified tax deferred amount at full income inclusion put on your tax return the year that you renounce. That would not look good.”

“The third is defined as deferred compensation plans. That’s tax speak for pensions. So it's a full income inclusion of pensions, so that wouldn’t mean full amount would be taxed, because perhaps you've made some contributions to it, etcetera. You'd have run the tax calculation separately, but this is full income inclusion on deferred compensation plans.”

How does the US punish future beneficiaries if they receive gifts or bequests from people renouncing their US citizenship?

John Richardson: “Let's imagine that you're a US citizen, you renounce US citizenship, you have five million dollars of cash. Now, you wouldn't pay an exit tax because there's no gain on cash. But if then, say, I have a relative or a wife or somebody and I want to give them that five million dollars, then the Internal Revenue would say, ‘Not so fast buddy.’ You're a covered expatriate, you’re a bad person, you have dirty assets. If you have dirty assets, go back to the US first, and we’re going to confiscate them as a gift, 40 percent. It’s the only time the United States imposes a gift tax on the recipient of the gift rather than on the person who makes the gift, because you're no longer a US citizen. They cannot tax you.”

What type of citizenship options are available to US citizens wanting to relinquish their citizenship but still have relatively easy access to the US for personal and business visits for 60 to 90 days per year. Would the Grenada plus the E1 or E2 option be the best? What other options are there?

John Richardson: “I think that's really a fascinating option because citizenship in Grenada is—I think I'm comfortable recommending this—relatively easy to get. Yeah, it's not quite a purchase of citizenship, and the money goes a long way and not much of it to get citizenship… The thing that's interesting about Grenada is that they have the kind of treaty with the United States that would allow for a citizen of Grenada to get either an E1 or an E2 visa to do business in the United States. And this is a fantastic thing. And the reason it’s fantastic is you can get the visa through Grenadian citizenship and do business in the United States, but you can avoid the green card. The green card is what makes you a US tax resident. It can destroy your life because of worldwide income.”

Happy reading!

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