- Long-Term Residents - Taxed for Going Home
- January 19, 2011 | Authors: John M. Collins; Danika Hudik Mendrygal; J. Mitchell Miller; Jeffrey E. Raley; William D. Ratliff; Rice M. Tilley; Rebecca Whitacre
- Law Firms: Haynes and Boone, LLP - Dallas Office ; Haynes and Boone, LLP - Houston Office ; Haynes and Boone, LLP - Fort Worth Office ; Haynes and Boone, LLP - Dallas Office
Marriage has become as globalized as business today. If one spouse is a non-citizen, there are some minor challenges in drafting estate planning documents to minimize United States estate taxes, and we recommend consulting with counsel in the non-citizen’s home country. If the non-citizen’s family has substantial wealth, there are opportunities to reduce, or even eliminate, U.S. estate and gift tax on transfers to that individual. However, non-citizens can be subjected to an unexpected income tax if they establish residence in the U.S. and then return to their home countries permanently.
Congress has passed numerous “expatriation” laws over the past two decades, with the intent of punishing U.S. citizens who give up their citizenship and move abroad, taking substantial wealth with them that will no longer be subject to U.S. income, estate, or gift tax. In comparison to earlier laws, the current rules are relatively simple, but their reach can be much broader. An expatriation income tax will apply to any citizen who gives up citizenship and to “green card” holders (lawful permanent residents) who have resided in the U.S. for eight of the past fifteen years prior to either leaving the U.S. or giving up lawful permanent resident status (or taking a treaty-based position on a U.S. income tax return that reduces U.S. taxes).
If the expatriation tax rules apply, there is an immediate capital gains tax based on the fair market value of all assets owned on a worldwide basis. In addition, tax will apply at the highest estate and gift tax rate to any future transfers by gift or at death to any individual who is a U.S. citizen or resident (35% during 2011 and 2012, but scheduled to rise to 55% in 2013). This transfer tax will apply whether the transfer is made from the expatriated individual or from a trust (U.S. or foreign) that can be traced to the expatriated individual. For example, if a U.S. citizen marries a Mexican citizen and the Mexican citizen becomes a green card holder and resides in the U.S. for more than eight years during a fifteen-year period, and they move permanently to Mexico, gifts from the Mexican citizen to any children who remain in the U.S. will be subject to gift tax at the highest current rate, for any amount in excess of the annual gift tax exclusion (currently $13,000 per year per recipient).
These taxes will also apply to a lawful permanent resident who remains in the U.S. but gives up green card status or who accidentally becomes subject to the tax by taking a position on a tax return that saves U.S. taxes. In some cases, a non-citizen who has moved to the U.S. for an indefinite period of time but may return to his or her home country permanently, should seriously consider not applying for a green card unless or until he or she decides to become a U.S. citizen. Also, someone who has a green card and has been a resident in the U.S. for less than eight years might consider giving up his or her green card status unless he or she intends to remain in the U.S. permanently and/or become a U.S. citizen.
There are exceptions for individuals who have a gain on worldwide assets of less than $600,000, as indexed for inflation ($627,000 in 2010), or have a net worth of less than $2,000,000 and average annual net income from the preceding five tax years of $145,000 or less.