Last week we discussed the process of abandoning U.S. citizenship or lawful permanent resident status. This expatriation process involves legal steps as well as related tax filings. Depending on the financial status of the expatriating taxpayer, an expatriation tax may apply. If the tax applies, the expatriating individual is subject to income tax on the net unrealized gain in his or her property as if the property had been sold for its fair market value on the day before the expatriation date, but up to $693,000 (2016 amount) of gain can be excluded. Certain assets, such as eligible deferred compensation, are excluded from the “deemed sale” calculations and are taxed under a different set of rules.
This week we will look at the fictional case of Francois, a French citizen who has decided to leave the United States and return home.
Francois Bouchard had originally come to the United States for a two-year work assignment with the intention of returning to his native country of France. As sometimes happens, plans change. He fell in love, got married, and took a permanent job in the United States. His wife was a U.S. citizen, and he applied for and obtained a green card. That was 18 years ago.
He and his wife eventually grew apart and divorced. They did not have any children. Francois’ parents (French citizens and residents) are growing older and his dad is in poor health. About 10 years ago Francois received a 15% interest in the family business (a French vineyard) and his father intends to leave the remaining interest in the business to Francois. Francois has always dreamed of returning to France and the family vineyards but was never sure when would be the right time.
Francois meets with his tax adviser to go over the numbers. The family business is now worth about $10M USD, so Francois’ 15% interest is worth $1.5M. His basis is only about $200K. Francois’ only other asset is a U.S. brokerage account worth approximately $300K. Based on his net worth and prior income tax returns, Francois is currently below the threshold for the expatriation tax. However, should his dad die and leave the rest of the business to him, he would no longer fall below the expatriation tax threshold.
Francois decides the right time is now. He knows his father could use the help, and Francois might as well abandon his U.S. residency before there are significant tax consequences of doing so. He contacts an immigration attorney for assistance in abandoning his permanent lawful resident status. He meets with his tax adviser to arrange for the filing of his final income tax return and the additional form related to his expatriation, and to discuss the U.S. tax issues related to his brokerage account. The tax adviser also counsels him on how to avoid inadvertently qualifying as a U.S. resident after he expatriates, which could happen if he spends too much time in the U.S. within a year or two of his expatriation date. Francois is excited about returning to France and glad he consulted with his tax adviser sooner than later.
Stay tuned for next week’s example of the tax implications of expatriation. And as always, contact us with any questions you may have related to international tax issues.