What is an Expatriation Tax?

An expatriation tax is a rate of tax or fee that is charged on the property or estate of citizens who has renounced citizenship. This tax is enacted and charged on property located in the United States. The expatriation tax is laid down under section 877 and section 877 A of Internal Revenue Code (IRC) which is applicable to the value of the property of U.S citizens and long term citizens who have given up citizenship to avoid federal taxes. However, different rules are applied when calculating an expatriation tax of a person who has been expatriated.

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How is an Expatriation Tax Used? 

An expatriation tax is applied to those citizens of the USA who give up resident ship or citizenship and settle in some other foreign country after June 17, 2008. An expatriation tax is imposed on any person who expatriates and owns over $2 million estate. The expatriation amount varies from time to time which is usually based on the inflation rate. However, the rate was $160,000 in the year 2015. An expatriation tax is not levied in every part of the world. Practices of states vary and few countries across the globe impose expatriation tax. For instance, the USA and Eritrea impose income tax on their citizens who abandoned residence and settle in other foreign countries. However, Canada levy departure tax on those citizens who immigrate to other parts of the world but this is not identical to expatriation tax.

How Does Expatriation Tax Work?

An expatriation tax is charged on the values of an individuals property located in the USA, it is charged before they expatriate. The Internal Revenue System (IRS) is the authority responsible for calculating and imposing taxes on individuals and firms located in the USA. Internal Revenue System (IRS) while calculating expatriation tax, IRS considers the market value of an individuals property as though individuals are going to liquidate assets on the same day. Net gain under tax can be calculated by subtracting the historical cost from the market value of the taxpayers property. Similarly, losses are taking into account while calculating expatriation tax. The expatriation tax is applied to the net gained over $680,000. However, the amount is adjusted for inflation. The IRS may impose more taxes on those who tried to evade tax liability. However, individuals may be exempted from expatriation tax if they convince Secretary of Treasury that their reason for expatriation is not to evade taxes. Also, the IRS imposes penalties on those who do not submit expatriation form 8854 and the penalty of not filing expatriation form is $10,000.