Section 877A Expatriation Tax

Section 877A expatriation tax is paid to the IRS when a U. S. citizen or green card holder gives up their U.S. status. This is appealing to traders, investment manager and other taxpayers who are “covered expatriates” and have a net worth of $2 million or a 5-year average income tax liability exceeding $139,000.  This is attractive because other countries have extremely lower tax laws than the United States.  The IRS decides the tax amount based on the expatriation tax on unrealized capital gains on all assets (fair market value minus cost –basis including debt) on the expired date. The IRS can then tax the amount over $600,000, which includes deferred compensation and IRA’s.  There are many factors to contemplate when deciding if this is the right move for you, such as, US beneficiaries of US real property and estate planning and choosing to defer tax with applicable income rates. There is much to learn about this tax so make sure to take time to become familiar with all the fine details.

The United States has always encouraged foreign taxpayers to invest and trade with U.S. business and in the financial markets, whether they live in or out of the United States. A non- resident alien living in the US is held to similar tax laws as a citizen. They are subject to tax withholding on dividends, sales of master limited partnerships, and certain interest income.  U. S.  (ECI) non- resident alien living abroad can open a futures trading account or a U.S. based forex and not owe any taxes to the U.S; however this does not apply to dealers. Opening a U.S. based securities account is also available to them, but be prepared for some dividend tax withholding. Depending upon the length of stay in the United States, a non-resident could owe taxes on net U.S. source capital gains. Even if he doesn’t count as a resident under the substantial presence test, if he stays more than 183 days he will be taxed. If you are an employee of a foreign government living in the United States or a student attending school, there are some exceptions to the rule.  W-8BEN is the form to fill out if you are a non-resident individual and then give it to the broker.  When chooses a single-member LLC (filed in Delaware W-8BEN-E) to establish a U.S. entity for opening a U.S. based brokerage account; there are some things to consider as you consult with your broker. For example, does the broker allow international payments? How can you send money back home? Can you open a U.S. bank account for the business without physically being there or with out a U.S. address?

There are many business partnerships that include a non-resident and a U.S. resident.  In most cases the foreign partner would have U.S. ECU on their K-1 income. If the Non-resident is a member of a U.S. based “pass through” taxable entity (ex. Proprietary trading firm, hedge fund) that person is still considered as receiving no income.  There are some changes when the partnership is a trading company but only in a financial market (not goods) in which case the income is considered portfolio income on both partners. It is not required to withhold taxes on a foreign partner if he has portfolio income not subject to U. S. tax.  Adding dividends to the partnership complicates things because dividends tax isn’t withheld for the foreign partner’s share. 

Much effort and careful time and consideration needs to happen when dealing with world trade and taxes. There is so much opportunity for foreign trade and foreign partnerships, but with all the excitement comes lots of rules and regulations. There needs to be a balance in managing international trading and staying on top of your taxes.  Be responsible in showing all income in and out of the United States.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.