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Q: IRS Rule regarding renouncing U S Citizenship ( Answered 5 out of 5 stars,   1 Comment )
Question  
Subject: IRS Rule regarding renouncing U S Citizenship
Category: Miscellaneous
Asked by: regino-ga
List Price: $20.00
Posted: 26 Oct 2006 15:38 PDT
Expires: 25 Nov 2006 14:38 PST
Question ID: 777267
Hello
I would like to know the following; if a naturalized U S Citizen
renounces his citizenship and goes back to Mexico, how long must he
live in Mexico to avoid payment of U S federal income tax (especially
the death tax).
Answer  
Subject: Re: IRS Rule regarding renouncing U S Citizenship
Answered By: keystroke-ga on 26 Oct 2006 18:49 PDT
Rated:5 out of 5 stars
 
Hello regino,

Thank you for your question. The answer depends on the level of the
person's income. From what I can tell, if a person pays less in taxes
than $124,000 a year or have less than $2 million in the bank, as long
as the IRS' reporting requirements are followed one would be safe from
taxes starting for the first year that citizenship is not held.

IRS -- Expatriation Tax
http://www.irs.gov/businesses/small/international/article/0,,id=97245,00.html

If the renouncer has a high income, he will be assessed and possibly
still have to pay tax for up to 10 years after citizenship is
renounced.  Anyone else will have to notify the Department of State or
Department of Homeland Security that they have renounced citizenship
or continue to be taxed.

"Amended IRC 877 eliminates the tax avoidance criteria for imposition
of the expatriation tax on certain types of income for 10 years
following expatriation, and creates objective criteria to impose the
tax on individuals with an average income tax liability of $124,000
for the 5 prior years or a net worth of $2,000,000 on the date of
expatriation. In addition, it requires individuals to certify to the
IRS that they have satisfied all federal tax requirements for the 5
years prior to expatriation and requires annual information reporting
for each taxable year during which an individual is subject to the
rules of IRC 877. Further, expatriated individuals will be subject to
U.S. tax on their worldwide income for any of the 10 years following
expatriation in which they are present in the U.S. for more than 30
days, or 60 days in the case of individuals working in the U.S. for an
unrelated employer.  Finally, even if they do not meet the monetary
thresholds for imposition of the IRC 877 expatriation tax, the new law
provides that individuals will continue to be treated as U.S. citizens
or long-term residents for U.S. tax purposes until they have notified
the Secretary of the Department of State or of Homeland Security of
expatriation or termination of residency."

If a person has not paid his or her taxes promptly and accurately for
the past five years, he or she would still be subject to the same
rules that wealthy people are as listed above.

"If all federal tax requirements have not been satisfied for the 5
years prior to expatriation, even if the individual does not meet the
monetary thresholds in IRC 877, the individual will be subject to the
IRC 877 expatriation tax provisions."

If one does not fill out the form notifying the IRS of the situation,
one would be subject to a $10,000 fine.

"The Internal Revenue Service reminds practitioners that anyone who
has expatriated or terminated his U.S. residency status must file Form
8854, Initial and Annual Expatriation Information Statement (PDF).
Form 8854 must also be filed to comply with the annual information
reporting requirements of Internal Revenue Code section 6039G, if the
person is subject to tax under Section 877 of the Code. A $10,000
penalty may be imposed for failure to file Form 8854 when required."

Search terms:
renounce citizenship taxation
citizenship renounced tax purposes

If you need any additional clarification, let me know and I'll be glad
to assist you.

--keystroke-ga

Request for Answer Clarification by regino-ga on 27 Oct 2006 04:46 PDT
Thank you for your answer but you did not address the "Death Tax"
issue.  I do not pay over $124K in taxes a year or anything close to
because I am retired but my Estate is worth over two million dollars
and I am trying to avoid the 50% payment of the Estate Tax if
possible.

Are you saying that since my Estate is worth over two million dollars
I would still be subject to IRS tax payment (including Estate Tax) for
a period of ten years after I renounce my U S Citizenship and move
back to Mexico?

Clarification of Answer by keystroke-ga on 28 Oct 2006 07:06 PDT
Hello regino,

Yes, the rule is that if you have a net worth of $2 million or more OR
pay more than $124,000 a year (adjusted for inflation) in taxes, you
are assumed to be moving for tax reasons and you still have to pay US
taxes for the next 10 years.  Net worth includes everything that you
have, so even money in the bank that you never touch would count. 
There is a loophole I found which could help you in these
circumstances.

US Transfer and Tax Rules
http://d2d.ali-aba.org/_files/thumbs/course_materials/SL032-CH02_thumb.pdf

"Except as provided in 3. below, an expatriate will be subject to tax under
 877(b) for the 10-year period after expatriation if as of the date of
expatriation he had a net worth of at least $2,000,000 or an average net
income tax for the five years prior to the expatriation of more than
$124,000, or he fails to certify under penalties of perjury that he has met
all U.S. tax obligations for the 5 preceding taxable years or fails to submit
such evidence of compliance as the Treasury Secretary may require. The
$124,000 limit is subject to a cost of living adjustment for years after
2004."

As far as I can tell, this does include the estate tax (death tax):

"To the extent that an individual meets the criteria stated above,
(s)he will be deemed to have renounced citizenship or surrendered
his/her greencard for tax avoidance purposes.

In this case, US income (as well as estate and gift) taxes will be
imposed on broader categories of US source income and US situs assets.
This will continue for 10 years from the time of expatriation."
http://www.pwcservices.com/PwC_Serv/IAS/IASMARKETING.NSF/10086696c9bcd74585256ab2006f7162/d06a57336da3f6fc86256cbe005eeea9?OpenDocument

There is a possible loophole that you should definitely check out, but
whether a ruling would be in your favor or not, I don't know.  If you
are going back to the country of your birth, you may be able to get
out of the taxation clause.

"The current rules do allow for certain individuals to apply for a
ruling to gain exemption from these regulations if it can be shown
that:
1. The expatriation does not have as "one of its principal purposes"
the avoidance of US tax.
2. If the individual is expatriating to the country of his/her birth
(or that of his/her spouse or parents).

Note: Expatriation to the country of birth does not automatically
result in exemption from Sec. 877 rules. Rulings against the taxpayer
in such circumstances have occurred."

Search terms:
irc 877 estate tax

If you need any additional clarification, let me know and I'll be happy to help.

--keystroke-ga
regino-ga rated this answer:5 out of 5 stars and gave an additional tip of: $5.00
Excelent work.  Thank you very much.

Comments  
Subject: Re: IRS Rule regarding renouncing U S Citizenship
From: keystroke-ga on 31 Oct 2006 08:37 PST
 
Thank you very much for the five stars and the tip! :)

--keystroke-ga

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