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Senior Analyst. LoVasco Consulting Group, Inc. Detroit MI. Guest Article From the June 30, issue of Deloitte 's Washington Bulletina periodic update of legal and regulatory developments relating to Employee Benefits.
A long-term permanent resident is any individual who was a lawful permanent resident green card holder for any part of at least 8 of the last 15 taxable years. Generally, the actual act of expatriation for a U. Department of State; the date on which U. Department of State issues to the individual a certificate of loss of nationality; or the date on which a U. Note that a renunciation or relinquishment must be subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U. Department of State.
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A green card holder is deemed to have expatriated on the date that lawful permanent resident status ceases. This generally occurs either on the date a green card is determined to have been revoked or judicially or administratively abandoned, or on the first day of a tax year for which a long-term permanent resident invokes a tax treaty to be treated as a resident of a foreign country and does not waive the benefits offered by the treaty to residents of such foreign country.
Losses may be taken intobut only to the extent of gains. Thus, application of the expatriation rules may not result in a loss for tax purposes.
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A basis adjustment is applied to all property subject to the deemed sale provisions to ensure that a future sale does not result in double taxation as a result of the application of the deemed sale rules. For purposes of determining the basis of property subject to the deemed sale rules, property that was held by an individual on the date the individual first became a resident of the U. An individual may elect not to have this step-up in basis apply.
Basis of property acquired after the residency start date would be computed under the standard basis rules. Special rules apply to certain deferred compensation assets, certain interests in foreign trusts, and specified tax-deferred s.
Deferral of Tax An election may be made to defer payment of the mark-to-market tax imposed on the deemed sale of property. Interest is charged, the election is irrevocable, and bond or other security must be furnished.
Generally, the deferred tax is due when the return is due for the taxable year in which the property is disposed, but may not be extended beyond the due date of the return for the taxable year which includes the individual's death. Treatment of Nonqualified Deferred Compensation Special rules are applicable for an eligible deferred compensation item.
Generally, an eligible deferred compensation item is any deferred compensation item with respect to which the payor is either a US person or certain non-US persons who elect to be treated as a US person for purposes of withholding, and the covered expatriate notifies the payor of the covered expatriate status and irrevocably waives any claim to withholding reduction under any US treaty. A payment is subject to withholding to the extent it would be included in the individual's gross income if the individual was subject to tax as a U.
Adjustments are made to subsequent distributions to take into this treatment. Additionally, the deemed distributions are not subject to early distribution tax.
These rules do not apply to the extent the deferred compensation is attributable to services performed outside the US while the covered expatriate was not a citizen or resident of the US. Specified Tax Deferred s For specified tax-deferred s such as individual retirement plan, qualified tuition plans, a Coverdell education savingsa health savingsand an Archer MSAthe is treated as having been distributed on the day before the expatriation date. The deemed distribution is subject to income tax at ordinary income rates, however, the penalties normally applicable to early withdrawals do not apply to a deemed distribution under the expatriation rules.
A basis adjustment is made to reflect the taxation incurred as a result of the deemed distribution under the expatriation rules. Trust Interests With respect to the portion of a trust for which the covered expatriate is treated as the owner under the grantor trust rules, the assets are subject to the mark-to-market rules.
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However, the mark-to-market rules do not apply to any trust or portion of a trust not treated as owned by the covered expatriate immediately before the expatriation date. Instead, in the case of a distribution from a non-grantor trust, the trustee must withhold 30 percent of the portion of the distribution which would be includible in the gross income of the covered expatriate if he or she had been subject to tax as a U.
The covered expatriate is treated as waiving any right to claim a reduction in withholding under any U. For this purpose, a gift or bequest includes property acquired by gift directly or indirectly from a covered expatriate or directly or indirectly by reason of the death of a covered expatriate.
Special rules apply to gifts or bequests made to domestic or foreign trusts by a covered expatriate. The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or versions of Washington Bulletin, please contact: Robert Davis CopyrightDeloitte.
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