Part II: Common Myths about the U.S. Tax and Legal Consequences Surrounding “Expatriation”

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· More Myths – about Renouncing U.S. Citizenship

There are many misunderstandings of how the law works when someone renounces U.S. citizenship. See, Part I: Common Myths about the U.S. Tax and Legal Consequences Surrounding “Expatriation”

The author regularly hears a range of myths that will befall an “Accidental American” when and if, they renounce. These “myths” include the following:shutterstock_1078286

  • Myth 5: There is no requirement to file U.S. income tax returns if the individual has few assets, little income or has otherwise lived outside the U.S. for almost all of their lives.
  • Myth 6: There is somehow some “magical difference” under the law, for those who “renounce” citizenship (currently) versus those who “relinquished” citizenship (some time in the past) and the U.S. Department of State should recognize this “magical difference”.  Such a difference will create a different U.S. tax result.
  • Fact:  The tax law nor immigration law makes such a distinction, even though this seems to be a common myth frequently spread throughout the Internet.
  • Myth 7 : Former U.S. citizens who are “covered expatriates” can gift assets to their U.S. citizen children and friends without U.S. tax costs to them.
  • Fact: This is true, i.e., there is no restriction or tax that is levied against the former U.S. citizen who makes the gift.  The problem is for the recipient U.S. citizen or other “U.S. person” children or friends who will become subject to tax upon such gifts at the highest estate and gift ta rate (currently 40%).
  • Myth 8:  Former U.S. citizens should not worry about the IRS and its ability to collect taxes owing for the “mark-to-market” gains tax on expatriation (or on covered gifts and covered bequests) against assets located outside the U.S.?

These are just some of the myths commonly floated.  There are yet more myths which will be discussed in a later post.

 

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