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Are there any exceptions to the mark-to-market regime?

Yes, the Code provides that deferred compensation items are not taxed under the mark-to-market regime. Deferred compensation items include interests in qualified and non-qualified U.S. and foreign retirement and deferred compensation plans, other deferred compensation, and interests in property for performance of services to the extent not previously included. Instead, alternative tax regimes apply to “eligible deferred compensation items” and “ineligible deferred compensation items.”

For eligible deferred compensation items, generally the payor must deduct and withhold a tax equal to 30 percent of any taxable payment to a covered expatriate with respect to such an item. Deferred compensation is eligible if paid by a U.S. payor or foreign payor electing, under terms acceptable to the IRS, to be treated as a U.S. payor. The covered expatriate must again waive applicable tax treaty benefits and notify the payor of status. In the case of ineligible deferred compensation items, the covered expatriate is subject to taxation on the item as if received by the covered expatriate on the day before the expatriation date.

The mark-to-market regime does not apply to specified tax deferred accounts. A covered expatriate is treated as having received a distribution of his or her entire interest in such account on the day before the expatriation date. This includes IRAs, a qualified tuition plan, a Coverdell education savings account, a health savings account, and an Archer MSA. However, this does not include simplified employee pensions or simplified retirement accounts, which are treated as deferred compensation items.

Excluded to, from the regime, are nongrantor trusts. “Nongrantor trust” means the portion of any trust, whether domestic or foreign, of which the covered expatriate is not considered the owner determined as of the day before the expatriation date. On the other hand, any direct or indirect distribution of property (including money) to a covered expatriate from a nongrantor trust of which the covered expatriate was a beneficiary on the day before the expatriation date, the trustee must deduct and withhold from the distribution an amount equal to 30 percent of the taxable portion of the distribution. No such exception applies for grantor trusts-the assets are treated as belonging to the expatriate grantor and consequently marked to market.