At Plan First Wealth, we often talk of “landmines”.

From a financial planning perspective, we see these in relation to an action you take, or don’t take, that could end up with you facing a punishing and unexpected tax charge on your assets or income.

While sometimes it’s easy to set off a landmine through no fault of your own, more often than not, the cause can be attributed to poor planning, or no planning at all.

A recent We’re the Brits in America podcast that we recorded really brought home one such example whereby a lack of planning could genuinely result in you facing severe tax charges: leaving the US.

This podcast was the latest in our “Ask an expert” series. We spoke to Virginia La Torre Jeker, JD, who has been a member of the New York State Bar since 1984 and is a preeminent US tax professional.

Virginia highlighted the effect of the Expatriation Tax, which is usually referred to as the “Exit Tax”, and the dangers of not having an effective exit strategy when you leave the US to live in another country, either to work or retire.

Leaving the US does not automatically mean you have no tax obligations

The problems she discussed relate specifically to you if you hold a green card, but they can equally apply if you are giving up your US citizenship.

They derive from the serious misconception held by many that simply by leaving the US and/or letting your green card expire will mean that you are no longer liable for US taxes. In reality, your tax obligations don’t end when your card expires.

Instead, you could still be seen as a Legal Permanent Resident (LPR) until you go through the process of formally relinquishing your green card.

Likewise, if your green card is still valid but you are living outside the US, you still need to submit annual tax returns to the IRS.

Properly relinquishing a green card requires completing Form I-407 and filing it with USCIS. Unfortunately, this is not an easy process that can be carried out online. It must be done after you have left the US and the form submitted by mail, although there may be an option to hand it in at a US consulate.

Separate to this, you also need to file Form 8854 with the IRS.

Before you file Forms I-407 and 8854 it’s important for you to be familiar with the concepts of “long-term LPR”, and “covered expatriate”. Failure to do this, and acting accordingly, could result in you being liable for substantial exit taxes, even though you are no longer resident in the US.

You should take steps to avoid the status of a covered expatriate

To be considered a long-term LPR, you need to have had a green card for eight years out of the last 15. As partial years – even just a matter of a couple of days – count towards that figure, it’s easy to attain long-term LPR status without realising it.

Once you have, you then only need to meet just one of the following three criteria when you leave the US to be a covered expatriate:

  1. On the date you left, your net worth (assets less liabilities) was in excess of $2 million.
  2. In the five years before exiting, you had an average net annual Income Tax liability of $206,000 or more.
  3. You fail to certify on a Form 8854 that you have fulfilled your tax liabilities with the IRS over the previous five years.

In our experience, the most common criteria that individuals fall foul of is the $2 million of net worth, especially given rising property values and the recent bull market.

Net worth relates to a fair market value (FMV) of all your relevant assets, including property and business interests.

The financial consequences of covered expatriate status are severe

If you are covered expatriate, then the exit tax will apply. It’s something of an understatement to say that the cost of this can be severe.

For example:

  • The IRS will assume that all your worldwide assets are sold on your date of leaving, and you will then be taxed on the calculated gain. This, plus net investment Income Tax, could result in a tax charge of 23.8%
  • If you have an Individual Retirement Account (IRA), it is assumed that you take the entire value at exit as income, so it will attract an Income Tax charge of up to 37%.
  • Likewise, you will be deemed to have taken the whole value of any foreign pension as income and taxed accordingly.

The final point raises the important issues of liquidity and cash flow. Your worldwide assets that you will then be taxed on may well include the value of real property, even though you may not have yet sold the property.

Likewise, you could be taxed on the value of any UK pension, even though you can’t access it until you are 55, rising to age 57 in 2028.

Furthermore, you could then be liable for tax again in your new country of residence when you come to use those assets for their intended purpose.

There are ways to mitigate these charges, including setting up an effective gifting plan, but this needs to be set up in advance of your departure from the US to be effective.

You should ensure you have an effective exit strategy when you leave the US

The underlying message to take away from this is that if you’re leaving the US, either as a citizen or a green card holder, it is imperative to plan your exit.

Advance planning and professional advice can help avoid some of the issues and tax charges you’ve read about here.

Given the potential financial impact, and the possibility that becoming a covered expatriate could inhibit any subsequent return to the US (even as a visitor), it makes sense to start planning well before your intended departure date.

If you are reading this having already left the US and still have a green card, we would strongly recommend that you get professional tax advice to mitigate the financial implications when you report it.

Get in touch

If you are a British expat living in the US and are planning to leave the country, please get in touch to arrange an Exploratory Zoom call to talk through your options.

Please note

Plan First Wealth (PFW) is an SEC-registered investment adviser.

The information presented is for educational purposes only intended for a general audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.

Investments involve risk and are not guaranteed.

PFW has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience.

PFW has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences.

PFW has presented information in a fair and balanced manner.