The tax consequences of expatriating
One essential point before beginning the expatriation process is that you must have another citizenship - it’s not an option to become stateless. Therefore, you should seek advice before taking any action to ensure that renouncing your US citizenship is the best option for you.
If you’re a Green Card Holder, once you’ve held the card for eight years or more and then give it up or have it revoked, you’ll be treated as if you were expatriating and subject to the same rules as US citizens who relinquish their citizenship.
What type of expatriate are you?
Consideration should then be given as to what kind of expatriate you will be; whether you would be a ‘covered expatriate’ or not.
You're a covered expatriate if you meet one of the following criteria:
1) Your average US net income tax for the preceding five years is more than a specified amount that is adjusted for inflation ($172,000 for 2021).
2) Your net worth is in excess of $2 million on the date of your expatriation.
3) You fail to certify that you’ve met your US Federal tax obligations for the preceding five years.
If you’re a covered expatriate, you are subject to a deemed disposal of all of your assets based on their market value the day before you expatriate. An inflation adjusted exclusion is then applied ($744,000 for 2021) and any resulting gain is subject to Federal tax at the relevant tax rate. This can cause significant problems if it results in a tax charge in the US but, without the actual sale of the asset, there is a shortfall of funds to pay the tax that is due. Furthermore, when the assets are sold in the future it’s possible that the country of residence will also seek to tax any gains at that time and without giving any relief for the US tax previously incurred. This can result in double taxation.
Additional rules can also bring deferred compensation, pensions and similar items into tax at the point of expatriation.
If you do not meet the above criteria, then you will not have the tax burden of the exit tax or the accelerated taxation of deferred income items.
If you had dual citizenship in the US and another country from birth and you continue to live in that other country, you’ll have an easier path to expatriation as you’re entitled to sidestep the covered expatriate rules. You’ll still have reporting obligations, but the tax exposure is significantly reduced.