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The Exit Tax and Retirement Abroad

Among those folks nearing retirement, it is not uncommon to hear them discussing their options for where they might choose to retire. A significant number, attracted by the lower cost of living and slower pace in some countries, talk about leaving the United States in order to live elsewhere. A smaller number, apparently unconcerned with the cost of living, also would consider leaving the country to go somewhere they feel comfortable, though not at a lower cost.
One of the factors weighing against this approach and sometimes ending the thought before it gains any traction is the exit or expatriate tax assessed by the US against some of those leaving the country. This tax applies to persons who have a net worth of $2,000,000 or more on the date of the expatriation or termination of their residency and also applies to those who have an average annual income of $162,000 or more (for 2017 and the four preceding years) or who fail to certify compliance with all US federal tax obligations for the five years preceding expatriation or termination of residency.
The tax is determined by deeming that all of the property of the covered expatriate is sold for fair market value on the day before expatriation. Any such gain is taken into account for the tax year of this deemed sale. There is an exclusion amount of $699,000 (for 2017) exempting a portion of such gain from inclusion in income which may be helpful for those expatriating taxpayers without substantial gain. However, as you can see, this tax would be important to wealthier persons who might be considering expatriation and, when coupled with the fact that any future US source income may be taxed in the ten years following repatriation, could encourage them to decline expatriation. In addition, future gifts made to US persons by the expatriate are subject to the US estate and gift tax regime.
If you are considering expatriation or termination of your residency in the US, it will be helpful to consult with an attorney and/or accountant familiar with the requirements and forms you’ll need to file.

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