The US taxes its citizens and residents on their worldwide income, but what about people living abroad?
If you’re planning to move outside the country then you may owe Exit Tax (Expatriation Tax).
This article will cover who needs pay up the Exit Tax and what key things you need to know about this less known tax.
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What is Exit Tax?
Exit tax is a term used to describe the tax liability incurred by a person or organization when they leave a country.
Exit taxes can be imposed on individuals who relocate to another country, as well as on businesses that have operations in multiple countries.
Exit taxes are typically calculated based on the value of the assets that are being moved out of the country.
For individuals, this may include property, investments, and even pets. For businesses, exit taxes can be applied to goodwill, intangible assets, and other forms of property. Expatriation Tax can also be levied on inheritance, gifts, and trusts.
While exit taxes can be controversial, they are generally considered to be legal under international law.
Who Needs to Pay the Exit Tax?
Exit taxes can be a confusing and daunting topic, but it’s important to understand if you’re thinking of leaving the country.
In short, the Expatriation Tax is a tax levied on individuals and businesses who are seen as abandoning their tax residency.
This includes anyone who renounces their citizenship or green card, as well as anyone who moves their tax residence to another country.
The Exit Tax is intended to capture any unrealized capital gains that would have been subject to taxation if the individual or business had remained in the country.
For example, if you own stocks or other assets that have increased in value over time, you may owe Exit Tax on those gains when you leave the country.
The Expatriation Tax can also apply to businesses that are moving their headquarters overseas.
While it’s a complex topic, understanding the Exit Tax is important if you’re considering leaving the United States.
How is Exit Tax Calculated?
Exit tax is calculated using the form 8854.
When a person expatriates, or gives up their U.S. citizenship, they may owe “Expatriation Tax.” The Expatriation Tax is a capital gains tax on all of the person’s assets as if they had sold them on the day before they expatriated.
First, the person’s worldwide income for the year is computed. Then, deductions and credits are taken into account to determine the taxable income.
The Expatriation Tax is then calculated by applying the appropriate tax rate to the taxable income.
Exit Tax is due when the person files their federal income tax return for the year in which they expatriate.
However, if the person owes this Tax and cannot pay it in full, they may be able to make installment payments or request a waiver of interest and penalties.
Exit Tax is a complex calculation, so it is advisable to speak with your CPA or tax professional before expatriating to ensure that you understand your tax obligations.
Where do you file Form 8854?
You Can Mail IRS Form 8854 to the Internal Revenue Address below.
Internal Revenue Service3651 S IH35
MS 4301AUSC
Austin, TX 78741
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