To pay the Repatriation tax under IRC Sec 965 and annual GILTI tax or to Expatriate under 877A/ 877, the conundrum….
America is one of the only countries in the world which taxes individuals based on citizenship rather than residency. Currently, one third of Americans are living overseas for the first time, with the median age of a U.S expat being 49.1 years of age. But for retired expats, the prospect of giving up their U.S citizenship and moving abroad permanently is becoming a desirable prospect. This is following the news that new tax laws means retirees with businesses abroad will be hit hard. However, with expatriation comes the exit tax so, just how can U.S retired expats business owners handle their taxes?
The new taxes
Retired American expatriates with businesses abroad will now be required to a pay a one-time repatriation levy on old foreign profits. The figure owed will be as much as 17.5% of these profits. Meanwhile, going forward, an annual levy, known as ‘Gilti’ will also be enforced. This is on top of any taxes you already pay as an expatriate business owner and will still apply even if you qualify for theforeign earned income exclusion.The State Department won’t release statistics on the number of expats living overseas. However, they sent 500,000 Social Security benefits overseas in 2017, indicating that there’s at least this many retirees currently enjoying life in another country. However, factoring in those retirees who live off the earnings their businesses bring in, means there are thousands who will be hit by Trump’s new taxes.
As a retired American business owner living overseas, you’ll have to pay these new taxes so long as you retain your American citizenship.Although, if you are considering renouncing your citizenship, then you must be able to pay the exit tax, a tax imposed by the IRS on the gain of your assets. You can expect to pay as much as 23.8% on your net capital gains, so it can be costly to leave the U.S for good. However, if you wish to offset this cost, you could decide to forgo your U.S citizenship or find ways to fund what you owe. One way to do this is to release equity from your home. For seniors aged 62 years and over, taking out a reverse mortgage is the ideal way to gain access to immediate funds. By taking out such a loan, you’ll be offered a monthly sum of cash or a one off payment which can be used to pay your taxes. Alternatively, if you own a property both overseas and in America, you could sell one of them.
Travis Baldwin, an American who lives and owns a business overseas states that he’s had problems finding an attorney who understands the new complex tax laws. As a result of these complicated laws, experts believe many retired expat business owners will either try to fly under the radar or will ditch their U.S citizenship altogether. At this point you need to consider whether your circumstances make you liable for paying the exit tax. If your net worth is more than $2 million,your average net annual income tax liability is over $162,000 or you’re unable to certify your tax for the past five years, then you can expect to be taxed by the IRS before you leave the U.S.Regardless of whether you commit to paying these additional taxes, or decide to give up your American citizenship for good, it’s essential you obtain expert advice on the matter and ensure that you have the means to pay either the new taxes which have come into force or the costly expatriation tax the country has set.
New tax laws mean American expats who are also business owners now have a big choice to make. Either way, there is no way of escaping America’s tax system. Therefore, you should carefully consider whether your U.S citizenship or your business provides greater benefit.