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Expatriating from the United States Thumbnail

Expatriating from the United States

Daniel Weiss

While there are many reasons to retain US citizenship or green card status, sometimes the drawbacks seem to outweigh the benefits. In this situation, we tend to have conversations with clients regarding the implications of expatriating from the US, including the potential exit tax.  

Perhaps the most famous example in Singapore of a US person expatriating is Eduardo Saverin, the co-founder of Facebook (now Meta). He had a substantial stock position in the company and it was speculated that part of the reason for expatriating was to avoid capital gains tax.  

Whether or not millions of dollars can be saved from expatriating, it is still worthwhile to weigh the pros and cons.

What are reasons to expatriate?

When we speak with clients about expatriating, one of the key characteristics of a good candidate for expatriation is someone with little-to-no US connection. This might be:

  1. “Accidental American” (i.e., someone who was bequeathed US citizenship from a parent but has never lived in the country)
  2. Green card holder who is moving away from the US permanently
  3. Green card holder who will be abroad for 5–10 years, but then might return. Just because someone gives up a green card, does not mean they cannot get another by reapplying in the future

One common cause for expatriating is extra tax payments and burdensome reporting requirements, particularly for those with high income or who own a foreign business. Because Singapore is a low-tax jurisdiction and employment opportunities are lucrative, it is typical for our US clients to owe tens, if not hundreds, of thousands of dollars in US tax annually. This is on top of the Singapore tax they pay. 

Additionally, tax reporting and filing for US persons abroad is more complex and comes with higher fees to work with an experienced tax preparer. For those with foreign businesses, these issues are magnified. Moreover, penalties for non-compliance are severe (see here).

Lastly, for those with a US green card, it is important to consider the timing of expatriation, particularly if a large amount of wealth is involved or there is an expected inheritance/windfall in the future. Upon a green card holder becoming a Long-Term Resident (i.e., being a US lawful permanent resident for 8 of the last 15 years), this could lead to eligibility for an exit tax, provided other criteria is met. Mainly, one of three tests is passed:

  1. Annual net income tax for the preceding 5 tax years is above a certain threshold ($201,000 for 2024).
  2. Net worth is above $2,000,000.
  3. Failure to certify tax compliance for the preceding 5 tax years.

In this case, the covered expatriate test would be met and there might be a mark-to-market tax on appreciated assets and a deemed distribution on tax-deferred accounts. In other words, assets like US real estate and investments could be considered as sold and IRAs/401(k)s deemed as fully withdrawn on the day before expatriation, causing a significant tax bill.

 What are reasons not to expatriate?

The primary reason to maintain US status is if you have US connections (e.g., family, friends, and assets located there). If time abroad is only expected to be for a brief period of time and you’ll likely return to the US, it generally makes sense to keep US status.

Additionally, the US passport is ranked as one of the best in the world and there are incredible employment opportunities within the country, particularly for those in the tech and finance fields. Keeping US status provides access to countries across the world and opportunity for future US employment and career advancement.

Lastly, there could be tax implications. If a large amount of exit tax would be imposed, it might be beneficial to keep US status. Moreover, a lot of countries have higher tax rates than the US (e.g., most countries in Europe, Australia, Japan, etc.), so paying extra US tax is less of an issue. Depending on the current country of residence and desired retirement location, there might not be tax benefits to expatriating.

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When considering expatriating from the United States, it is essential to thoroughly consider the pros and cons and analyze the potential tax effect. It is a major decision with an impact that can have a significant effect on wealth, time, and energy for years to come. 

We work with clients to evaluate this decision within the scope of their goals and future vision for themselves and their family. For more information on whether or not expatriation makes sense, please reach out to one of our wealth planners.

This material is intended for educational and informational purposes only. It is not intended to provide specific advice or recommendations for any individual. Additionally, you should consult with your Financial Advisor, Tax Advisor, or Attorney on your specific situation. The views expressed in the material are that of the author and do not necessarily reflect those of any market, regulatory body, State or Federal Agency, or Association. All efforts have been made to report or share true and accurate information. However, the information may become materially outdated or otherwise rendered incorrect due to subsequent new research or other changes, without notice. The author nor the firm are able to always verify the content from third-party sources. For additional information about the firm, please visit the MAS Website at https://www.mas.gov.sg/  and the SEC Website at www.adviserinfo.sec.gov. For a copy of the firm's ADV Part 2 Brochure, please contact us at info@avriowealth.com.