The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Presentation to:

The 1818 Society on

The U.S. Exit Tax

Dale Mason, CPA

The Wolf Group

Disclaimer

Any U.S. tax issues addressed in the body of this presentation is 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.

The U.S. tax law is very complex, please seek professional tax assistance based on your specific situation.

The Exit Tax Agenda

History

Overview

Applicable Provisions / Compliance Issues

Planning

© 2013 The Wolf Group

Exit Tax History

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

Exit Tax History

New IRC Section 877A “Exit tax provisions” applicable to persons who relinquish their U.S. citizenship or terminate their long-term residency status after June 16, 2008

© 2013 The Wolf Group

Exit Tax History

More than 3,000 people expatriated in 2013

FATCA probably will cause further rise

IRS amnesty provisions

Increase in U.S. federal tax rates beginning in 2013

U.S. Tax Residency

U.S. Citizens and green card holders:

• U.S. income taxation on a worldwide basis

• U.S. gift and estate taxation on a worldwide basis

• Foreign financial asset reporting

Nonresident aliens:

• U.S. income taxation limited to U.S. sources

• U.S. capital gains from sale of securities generally not taxed

• U.S. estate and gift taxation generally only applies to U.S. situs property

What is the Exit Tax?

Applies only to “Covered Expatriates”

“Mark-to-Market” tax on deemed property gains exceeding $690,000 (2015)

Deemed distribution of certain deferred compensation

Deemed distribution of certain specified “tax-deferred accounts”

Gift and estate tax issues

© 2013 The Wolf Group

What is the Exit Tax?

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

Compliance requirements: Form 8854 and W-8CE

© 2013 The Wolf Group

Provisions

IRC Section 877A

IRS Notice 2009-85

IRS Notice 97-19

Form 8854 and Instructions

Form W-8CE and Instructions

No regulations yet!

© 2013 The Wolf Group

“Covered Expatriate”

U.S. citizens who relinquish U.S. citizenship Termination of “Long-term residency”

• Green card holders who cease to be lawful permanent residents

o8 out of 15 years

oCounting of years important

oRevoked or abandoned (not simply expired)

oTreaty tie-breaker provision

Failure to file Form 8854

5 year tax compliance requirement

© 2013 The Wolf Group

Net Worth Test

$2,000,000 or more of net worth

Global assets minus global liabilities

Value of assets determined under “gift tax principles” (appraisals not required)

Present value of pensions is included in net worth calculation

Net Worth Test Cont.

Present value of World Bank pension is included in net worth test

• Actual calculation should be made by an actuary

© 2013 The Wolf Group

Net Income Tax Test

Average annual net income (5 years)

• $160,000 (2015)

• Test applies to each taxpayer for joint liability

© 2013 The Wolf Group

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Q & A

Mark-to-Market Tax

$690,000 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 resident

Gains/income included in final U.S. resident tax return

© 2013 The Wolf Group

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

© 2013 The Wolf Group

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 or Prop. Reg 1.409A-4)

© 2013 The Wolf Group

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

© 2013 The Wolf Group

Specified Tax Deferred

Accounts

Not included in the “Mark-to-Market” tax

Specified Tax Deferred Account:

• Individual Retirement Accounts

• 529 Plans

Deemed distributed on the day before expatriation date

No early withdrawal penalty

© 2013 The Wolf Group

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

• Penalty for failure to timely file is $10,000

Form W-8CE

© 2013 The Wolf Group

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

• $14,000 (2015) annual exclusion applies

• Exception: Generally to U.S. citizen spouse

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© 2013 The Wolf Group

Simple 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

© 2013 The Wolf Group

The Wolf Group, PC • 4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033 • Tel: (703) 502-9500

Q & A

Contact Us

Pooja Kaur

New Client Liaison

pkaur@thewolfgroup.com

Tel: (703) 502-9500 x141

1875 I Street, NW (International Square), Suite 500, Washington, DC 20006

4401 Fair Lakes Court, Suite 310, Fairfax, VA 22033

www.thewolfgroup.com

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U.S. Immigration Basics

Biographical InformationEliot NormanPartner- International Williams Mullen Washington, D.C. T. 001.804.420.6213Cell. 001.803.721.7851enorman@williamsmullen.comwww.williamsmullen.com

Eliot Norman advises U.S. and Foreign Multinationals on how to deal effectively with their global mobility issues.

Mr. Norman is an International Practice Partner with Williams Mullen, a 250 lawyer national and international commercial law firm, with offices in Washington, D.C., Virginia and North Carolina. Eliot graduated from Yale College and Boston College Law School and served with the U.S. Department of Justice before entering private practice. He is listed in Best Lawyers in America for Immigration. He speaks French fluently and obtained a Certificate from the Institut d’etudes politiques, Paris, France. Mr. Norman regularly travels to Europe to meet with clients concerning investment projects and operations in the United States and to speak to industry trade groups and chambers of commerce.

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GREEN CARDS

LA PYRAMIDE DE VISAS AMÉRICAINS

L-1A/L-1B,

E1/E2 Investors/

Treaty Traders

TN, H-1B/O-1

B-1/ F-1/J-1/H-3, H-2B

90 Day

ESTA Visa

Waivers

B-1 Business

Visitors

(B/2) (tourists)

EB-1 Multinational Managers/Executives & EB-1

Extraordinary Ability and Outstanding Researchers;

EB2/3 PERM Labor Certifications for professionals, skilled

workers leading to Green Cards;

EB2 Green Cards for National Interest Waivers,

FAMILY SPONSORSHIP (marriage to U.S. Citizen or, Green

Card Holder; Diversity Lottery. EB-5: $500,000 Investors

EXECUTIVES, MANAGERS, Specialists and Essential-

Skills Employees for U.S. Offices of International

Companies

PROFESSIONALS; Extraordinary Ability

Scholars & Scientists

TRAINEES & FOREIGN STUDENTS

Research Scholars & Specialists;

Temporary workers , VIE , Interns.

BUSINESS VISITORS:

Negotiate Contracts, Consult;

Trainees, Install Equipment

if Purchased Overseas; Visa Waiver

B-1 au lieu de H-1B: 6 month project

requiring professional services.

6693462

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U.S. Immigration Basics: Green Card Holders Overseas

Who is an expatriate?

Green Card Holders: a Definition

Their Value to your Company

The Doctrine of Abandonment

Consequences of Abandonment

Tips to avoid Abandonment

• Myths and Reality

Practical Solutions

One size does not fit all

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U.S. Immigration Basics: Reentry or Travel Permits

Filing of I-131

Must be in the USA at the time of filing

Biometrics and your expatriate’s travel schedule

Effect: not a panacea or absolute guarantee

Subsequent Travel Permits: up to 5 or 6 years total in 1 year increments

Use as a planning tool and success

rate

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U.S. Immigration Basics: Nonimmigrants

Some definitions

Basic Rules

Advantages/Disadvantages

Practical Problems

Practical Solutions

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U.S. Immigration Basics: Obtaining U.S. Citizenship

The Path to Citizenship: “Naturalization”• Prerequisite: Must be a Green Card Holder First • Basic Procedures to be Naturalized

Some Definitions and Concepts:• The waiting game: 3 and 5 years • physical presence test 50% of the 3 or 5 years • continuous residence tests

The Technicalities • definition of continuously reside• 90 day test: reside in state where application if filed:• Must “continuously reside” in USA from date of natz application until

obtain citizenship

Dangers of “Disruption of Residency” when Green Card holders are sent to overseas assignments

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U.S. Immigration Basics; “preserving continuous residence” for naturalization

Practical Solutions: Preserving Residency for

Expatriates on the Path to U.S. Citizenship

The N-470: “Don’t leave home without filing it” • basic eligibility: 1 year continuous uninterrupted

physical presence after obtaining permanent residence and BEFORE being sent overseas

• N-470 preserves “continuous residency” while working overseas for “U.S. company”. How defined?

Practical Examples: How it works

Additional exemption for foreign Green Card spouse who accompanies U.S. citizen overseas to work

Final Pointers