Frequently Asked Questions
Who is eligible for the Foreign Service Deferred Compensation Exclusion?
Applies to covered expatriates with deferred compensation earned during non-resident foreign service.
How does the Foreign Service Deferred Compensation Exclusion work?
Excludes deferred compensation from expatriation tax to the extent it is attributable to services performed outside the U.S. while the individual was not a U.S. citizen or resident.
What law authorizes the Foreign Service Deferred Compensation Exclusion?
The Foreign Service Deferred Compensation Exclusion is authorized under IRC §877A(d)(5) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §877A
Source: Internal Revenue Code, Title 26, United States Code
§ 877A. Tax responsibilities of expatriation(a) General rulesFor purposes of this subtitle—(1) Mark to marketAll property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.
(2) Recognition of gain or lossIn the case of any sale under paragraph (1)—(A) notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and
(B) any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss.
Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3).
(3) Exclusion for certain gain(A) In generalThe amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
(B) Adjustment for inflation(i) In generalIn the case of any taxable year beginning in a calendar year after 2008, the dollar amount in subparagraph (A) shall be increased by an amount equal to—(I) such dollar amount, multiplied by
(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 2007” for “calendar year 2016” in subparagraph (A)(ii) thereof.
(ii) RoundingIf any amount as adjusted under clause (i) is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
(b) Election to defer tax(1) In generalIf the taxpayer elects the application of this subsection with respect to any property treated as sold by reason of subsection (a), the time for payment of the additional tax attributable to such property shall be extended until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as the Secretary may prescribe).
(2) Determination of tax with respect to propertyFor purposes of paragraph (1), the additional tax attributable to any property is an amount which bears the same ratio to the additional tax imposed by this chapter for the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain taken into account under subsection (a) with respect to all property to which subsection (a) applies.
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