If you renounced your citizenship in the United States or another country, you may need to make changes to your estate plan. Depending on your net worth and other factors, your renunciation may lead to taxes now or taxes later.
How Does Renunciation Affect Taxes Now?
People who renounce their United States citizenship may owe taxes now if they are covered expatriates. Covered expatriates have:
- A net worth of more than $2 million on the date of expatriation;
- Average annual U.S. income tax liability of more than $165,000 for the five years before the year of expatriation; or
- Incorrectly filed U.S. tax returns for the five years before the year expatriation.
If you fall in any of these categories, the IRS may assess very expensive taxes against all of your property. Fortunately, some estate planning before renunciation can help. You potentially can reduce your taxable estate by strategies such as making lifetime gifts or starting a trust. Also, you can work with your accountant to potentially reduce income tax liability.
How Does Renunciation Affect Taxes Later?
When you become an expat from the United States, you lose tax benefits such as the $11.18 million estate tax exemption, the unlimited marital deduction, and estate tax portability. Instead, you will have only a $60,000 estate tax exemption. This can lead to expensive estate taxes after your death unless you plan ahead.
In short, if you still own any property in the United States that exceeds a $60,000 value, your estate may owe taxes on it after your death. Further, gifts to relatives who are U.S. citizens or to a citizen spouse could lead to taxes later too. Careful estate planning takes into account future taxes and potentially helps you reduce tax liability through structures such as qualified domestic trusts or holding companies.
The same tax consequences are true if you renounced citizenship in another country but are not yet a U.S. citizen or permanent resident. It’s a good idea to do some estate planning in the U.S. to protect yourself and your spouse from the expensive taxes that non-citizens often owe.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.