1818 Society The Exit Tax

1. 1818 Society The Exit Tax Dale Mason, CPA Robert Len, CPA, PFS The Wolf Group

2. Pursuant to Circular 230, promulgated by the Internal Revenue Service, any U.S. tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. © 2011 The Wolf Group

3. The Exit Tax Agenda • History • Overview • Applicable Provisions /Compliance Issues • Planning © 2011 The Wolf Group

4. History • New “exit tax provisions” applicable to persons who relinquish their U.S. citizenship or terminate their long-term residence status after June 16, 2008 • Prior law: Generally a 10 year alternative tax regime • First enacted 1966 • Strengthened in 1996 to include “long-term residents” • Presumptive tax avoidance if assets/income thresholds reached • 2004 law eliminated subjectivity & increased asset/income thresholds © 2011 The Wolf Group

5. Exit Tax Overview • Section 877A: “Mark-to-Market” tax on gains exceeding $636,000 (2011) and distribution of certain deferred compensation • Deemed sale of worldwide assets on the day prior to expatriation • Applies to “covered expatriates” • Renounce or relinquish U.S. citizenship • Termination of “long-term residency” status (GCH 8 out of 15yrs) • Net worth exceeds $2 million • Average 5 year tax liability exceeds $147,000 (2011) • Exceptions for dual-nationals (at birth) and expatriation before 18 ½ years old. © 2011 The Wolf Group

6. Exit Tax Overview • Imposition of a tax at the highest gift or estate tax rates on receipt by a U.S. person of a “covered gift” or bequest from a “covered expatriate” • Recipient pays the tax • Special rules apply to assets held in trust by a “covered expatriate” • Compliance requirements: Form 8854 and W-8CE © 2011 The Wolf Group

7. Provisions • IRC Section 877A • IRS Notice 2009-85 • IRS Notice 97-19 • Form 8854 and Instructions • Form W-8CE and Instructions © 2011 The Wolf Group

8. Covered Expatriate • U.S. citizens who relinquish U.S. citizenship • Termination of “Long-term residency” • Green Card Holders cease to be lawful permanent residents • 8 out of 15 years • Counting of years important • Revoked or abandoned (not simply expired) • Treaty tie-breaker provision • Failure to file Form 8854 © 2011 The Wolf Group

9. Income Tax & Net Worth Tests • Income tax test • Each taxpayer responsible for joint liability • Net worth test • Global assets minus global liabilities • Value of assets determined under “gift tax principles” • Tax liability determined under “estate tax principles” • Present value of pension is included in net worth calculation © 2011 The Wolf Group

10. Net Worth Test Cont. • Present value of World Bank pension included in net worth test • We believe that the taxpayer should use a special discount rate applicable to defined benefit plans • Actual calculation should be made by the Bank or an actuary © 2011 The Wolf Group

11. Q & A

12. Mark-to-Market Tax • $636K exclusion amount allocated pro rata to all assets having built-in gain • Green card holders are deemed to have basis in assets equal to FMV of assets on date first became a tax resident. • Gains/income included in final U.S. resident tax return • Defer tax? © 2011 The Wolf Group

13. Tax on Deferred Compensation • Not part of “Mark-to-Market” tax calculation • Deferred compensation • U.S. and foreign retirement plans • Eligible deferred compensation • Applicable to payments of deferred compensation made by U.S. payors • Payor must deduct and withhold 30% withholding tax © 2011 The Wolf Group

14. Tax on Deferred Compensation • Ineligible deferred compensation • Non-U.S. payor who fails to make the election to become U.S. payor • Present value of the covered expatriate’s “accrued benefit” is treated as being received on the day before expatriation • W-8CE presented to payor. Payor should provide the amount of the PV of accrued benefit within 60 days (Rev. Proc. 2004-37) © 2011 The Wolf Group

15. Tax on Deferred Compensation • Present value of “accrued benefit” does not include ineligible deferred compensation attributable to services performed outside the U.S. before the person became a U.S. citizen or green card holder. © 2011 The Wolf Group

16. Specified Tax Deferred Accounts • Not included in the “Mark-to-Market” tax • Specified Tax Deferred Account: • Individual Retirement Accounts • Coverdale education accounts • Health savings account • Deemed distributed on the day before expatriation date • No early withdrawal penalty © 2011 The Wolf Group

17. Q & A

18. Compliance Issues • Dual status tax return required for year of expatriation • File Form 1040NR in subsequent years • Form 8854 • Must certify compliance with all U.S. tax obligations for past 5 years (otherwise will automatically be considered a “covered expatriate”) • File the Form 8854 by the due date of tax return • Make election for “step-up” of assets at date of becoming a lawful permanent resident • Penalty for failure to timely file is $10,000 • Form W-8CE © 2011 The Wolf Group

19. U.S. Gift/Estate Tax Consequences • U.S. citizen or resident receives property either by gift or bequest from a “covered expatriate” • Transfer of the property is subject to tax • $13,000 annual exclusion applies • Equal to the value of the property multiplied by the highest rate of tax for federal estate tax or gift tax • The tax is payable by the recipient © 2011 The Wolf Group

20. Exit Tax Planning • Hold on to “long-term resident” status • Surrender green card before becoming a long-term resident (less than 8 year threshold) and obtain non-immigrant visa • Surrender green card before income tax/asset thresholds met and obtain non-immigrant visa • Become a U.S. citizen! • File U.S. taxes forever © 2011 The Wolf Group

21. Q & A