February 2016 – Tax Tips

Thinking about expatriation? Watch out for the “exit tax”

In recent years, a large number of Americans living abroad — or planning to do so — have renounced their U.S. citizenship to avoid U.S. taxes. Expatriation can provide a tax advantage over the long term: U.S. citizens and residents generally pay U.S. taxes on their worldwide income, while expatriates are taxed only on their U.S.-source income.

If you’re contemplating this strategy, consider the “exit tax.” The tax applies if you’ve been a U.S. citizen or resident for at least eight of the last 15 years and your average annual net income tax liability for the preceding five years exceeds a certain threshold ($161,000 for 2016), and your net worth is $2 million or more. Last, the tax applies if you fail to certify compliance with your U.S. tax obligations for the preceding five years.

If the tax applies, you’d be treated as if you’d sold all of your assets at fair market value on the day before expatriation. You’d also be taxed on the hypothetical gain to the extent it exceeds a certain threshold ($693,000 for 2016). But if you start planning early, certain strategies can minimize the exit tax, such as gradually liquidating appreciated assets or taking advantage of limited partnerships.

Undo your Roth IRA conversion?

For many people, converting a traditional IRA to a Roth IRA provides long-term tax advantages, but these advantages come at a short-term tax cost: When you convert, you must pay taxes on all of the contributions you previously deducted and on the account’s earnings. In addition, a Roth conversion may push you into a higher tax bracket.

If you did a Roth conversion last year, but the value of your IRA has since declined, consider undoing the conversion. Generally, you have until October 15, 2016, to undo a 2015 conversion. Then, so long as you wait at least 30 days, you can redo the conversion at a lower tax cost. Keep in mind that there’s a risk that the value of your IRA will rebound during the waiting period, resulting in even higher taxes.

No tax on identity protection services

Organizations that experience data breaches often provide identity protection services, free of charge, to their employees, customers or others whose personal information is at risk. These services may include credit reporting and monitoring, identity theft insurance and identity restoration services.

In a recent announcement, the IRS clarified that individuals whose personal information may have been compromised in a data breach needn’t include the value of such identity protection services in their gross income.

© 2016


Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share: