Giving up citizenship? 3 times you could owe an expatriation tax.

Thinking of giving up United States citizenship? You may owe an exit tax. The exit tax, also known as the expatriation tax, is due in certain situations when a citizen of the United States renounces his or her citizenship. The government determines this tax obligation based on one of three tests.

A failure of any one of the tests noted below will likely result in an expatriation tax.

Test #1: Tax Liability Test

The tax liability test involves a review of the taxpayer’s income. Since it is an income tax test the taxpayer can use deductions and credits to reduce his or her income tax liability. This can help to reduce the chances that the taxpayer would owe the exit tax.

Essentially, using this test the government would tax anyone that has an income that is over a specified amount. In 2018, this amount is set at $165,000.

Test #2: Net Worth Test

For the net worth test, anyone with a net worth valued over $2 million will generally owe an exit tax. A taxpayer can use various tools to reduce his or her net worth for this test. Examples can include the transfer of assets into a trust or gifting assets before expatriation. A taxpayer must tread carefully with these actions. A failure to act within the bounds of the law could result in allegations of criminal activity.

Test #3: Certification Test

The third test is the certification test. This one involves certification of tax compliance for the five years preceding the date of expatriation. Those who are not in full compliance can make amends, including reporting of foreign assets, prior to submitting this form.

In order to pass this test, the taxpayer must also either be a United States citizen and citizen of another country at birth or under the age of 18.5 on the date of expatriation and a resident of the United States for less than 10 years.

A taxpayer that can pass all three of these tests is generally not expected to pay an exit tax. If not, an expatriation tax will likely apply.

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