A tech founder selling her company for $60 million holds a US passport, a UK residence permit, two children from her first marriage, and unvested equity in the buyer. Each fact reshapes her advice.
These three concepts often blur in conversation and carry distinct tax consequences.
Citizenship is legal membership in a state, acquired by birth (jus soli), descent (jus sanguinis), or naturalization. Only the United States and Eritrea tax on citizenship globally. A US citizen owes US tax on worldwide income regardless of where she lives.
Nationality is the broader status of belonging to a state under international law. In most countries it overlaps with citizenship, but jurisdictions like the UK maintain subcategories with different rights.
Tax residency is a separate test. Common rules include the 183-day physical presence test, the US substantial presence test (a weighted three-year calculation), domicile (the UK common-law concept of intended permanent home), and treaty tie-breakers when two countries both claim the person.
KEY: A US citizen who moves to Monaco still owes US federal income tax. Only renunciation removes the obligation, and renunciation triggers the exit tax under IRC Section 877A on...
Common mistakes
- Confusing citizenship and residency for tax purposes. Only the US and Eritrea tax on citizenship. A US citizen abroad still owes US tax. Trap: telling a US client moving to Dubai that she has eliminated US tax.
- Treating QTIP and outright bequest as equivalent for blended families. A QTIP gives the surviving spouse income only; the remainder passes to chosen heirs. An outright bequest hands control to the spouse, who can redirect to her own children. Trap: a $15 million bequest "for my second wife and our kids" with no QTIP.
- Confusing Section 1042 and Section 1045. Section 1042 defers gain on an ESOP sale through reinvestment in qualified replacement property. Section 1045 rolls QSBS gain into new QSBS within 60 days. Trap: using 1042 language for a QSBS rollover.
Bottom line
- Citizenship, nationality, and tax residency are three different concepts. Only the US and Eritrea tax on citizenship; most jurisdictions tax on residency or domicile.
- Economic net worth equals financial capital plus the present value of human capital minus the present value of liabilities and consumption needs. Advice maximizes the sum, not the brokerage statement.
- QSBS Section 1202 excludes the greater of $10 million or 10× basis on C-corp gain held five years; stacking via non-grantor trusts multiplies the exclusion.
- Entrepreneurs face concentrated single-stock risk pre-liquidity, diversified with CRTs, GRATs, and exchange funds. Exits are third-party sale, ESOP with Section 1042 deferral, or family transfer.
Exam shortcut
If the client is a US citizen, US tax follows worldwide income regardless of residence. A move to Monaco or Dubai does nothing without renunciation, and renunciation triggers the Section 877A exit tax. For any concentrated-stock question, identify whether the constraint is insider-trading rules (10b5-1), holding period (exchange fund), downside protection (collar), or charitable intent (CRT) before recommending a tool.
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