U.S. citizens or long-term residents who expatriate after June 16, 2008, are treated as having sold all their worldwide property for its fair market value the day before leaving the U.S.
As far as the IRS is concerned, permanently leaving the country is something on the order of dying, because the tax burden is the same.
Here’s the deal: When you expatriate and renounce your US Citizenship, the IRS will treat you as though you sold all of your worldly assets at their fair market value the day before leaving. Consequence: The IRS will tax all such worldly assets as a “capital gain.” Accordingly, this tax event is known as the “exit tax.”
There are certain exclusions, to include the cases involving dual-citizenship or expatriation before age 18.5. Why? Because in either case you wouldn’t qualify as a “covered expatriate.” Additionally, you can escape this taxation if you have an overall value of less than $651,000 of (supposed) income.
Still, if you’re hoping to spend your golden years abroad, then it’s unlikely you will escape the grasp of the IRS by the above exclusions. Nevertheless, planning just might limit how much the IRS can take.
If nothing else, this kind of complete appraisal of your property is consistent with your overall estate planning. So, for those considering expatriation even remotely, why not kill two birds with one stone and make a full inventory of your assets right now. In addition, some strategic gifting may help lower the amount of your assets subject to the “exit tax” should you elect to pull the proverbial trigger.
For more background reading on this subject, consult a recent article in Forbes titled Tax Expatriates: We'll Always Have Paris.
Reference: Forbes (May 1, 2012) “Tax Expatriates: We'll Always Have Paris”