The American Exit Tax - One Year Later

On June 17, 2008, then President George Bush (where is he now?) signed an anti-expatriation tax law, Public Law No.110-245, unanimously passed by Congress under the misleading title "The Heroes Earnings Assistance and Relief Tax Act of 2008."

That Act imposed a harsh, punitive income tax regime on both U.S. citizens who expatriate, and on long-term U.S. residents ("green card holders") who decide to end their U.S. residency -- as both have a right to do.

Bad Company: The Act also placed the United States historically along side Hitler's Nazis, apartheid South Africa and the Communist Soviet Union. Each of those totalitarian regimes imposed an exit tax that robbed persecuted departing citizens (Jews, gypsies, political dissidents) with similar confiscatory taxes.

Much of this law has little to do with expatriation. It provides increased benefits for U.S. armed forces veterans. But because the budget rules of Congress require that new spending programs be accompanied by a source of revenue to finance them, left wing congressmen slyly wrapped their anti-wealth tax nostrums in the American flag.

2008 expat tax supposedly will finance the millions needed to pay for the veteran's benefits, but few believe that to be true. A study by the Congressional Budget Office guessed that the law might net the government up to $286 million over five years.

Radical Left Gets Its Tax Wish:

This expat "exit tax" was high on the wish lists of radical, left wing Democrats in the U.S. Congress for over a decade.

The chief sponsor, Rep. Charles Rangle, Democrat of New York, (below) chairman of the powerful, tax writing House Ways and Means Committee, slipped this horrendous tax into the popular military pension/pay bill, (without hearings or public notice). President Bush, the great tax cutter, signed it into law without so much as a whimper.

Rep. Rangle's sponsorship of the exit tax is more than ironic, since it was later revealed that he failed to pay taxes on over $100,000 in income as far back as 1988. He currently is under investigation by the House Ethics Committee (which probably will do nothing).

Legal scholars say this tax probably violates U.S. Constitution guarantees of the right to voluntarily end citizenship, as well as the right to live and travel abroad freely. I seriously doubt that any wealthy expatriate, lone gone from the U.S., would ever waste money on a court challenge.

Not Just for Billionaires:

This Act does not just apply to departing billionaires.

With a few exceptions for dual nationals and those with past ties to other countries, the tax applies to any expatriate: 1) with an average annual net income tax liability that exceeds US$139,000, adjusted annually for inflation for the five preceding years before the date of termination of U.S. citizenship or permanent residence; 2) with a net worth of US$2 million or more on the termination date; 3) who fails to certify under penalty of perjury compliance with all U.S. federal tax obligations for the preceding five years or who fails to submit any other proof of compliance the IRS demands.

Individuals who are within the grim numbers above are taxed enormously on everything they own, as if the person's worldwide assets had been sold for their fair market value on the day before expatriation or residency termination.

The Act allows exclusion of only $600,000 of net gain. That means a series of taxes could be imposed at the ordinary income rate of 35% or at a capital gain tax rate of 28% or more. (President Obama wants to raise both taxes). Gifts from an expat to those who remain in the U.S. may be subject to a new "transfer tax" at 45%. The Act even forces an expatriate to pay up to a 51% tax on distributions from retirement plans or other deferred payments.

One Year Later:

I know first hand that a surprising number of Americans are indeed considering expatriation, especially since the 2008 election. Many have been asking me how the IRS would administer exit tax.

Well now we know, if we can ever know what the IRS demands. As pointed out by international tax expert, Vernon Jacobs CPA, in spite of such a substantial change in expat tax rules and procedures, no new forms or instructions were available from the IRS for almost a year after the Act.

Finally the IRS has posted a 5 page Expatriation Information Statement (Form 8854) on the IRS web site, along with 8 pages of Instructions. and a lengthy text on General Information.

I've read these documents. When you see what the IRS is demanding from anyone who dares to exercise their right to expatriate, you will realize fully just how brutal the radical left in Congress can be when, as candidate Obama said, they have the power to "spread other peoples’ wealth around."

No doubt some persons who might be caught in this Draconian tax trap would be forced to sell most or all of their assets just to pay exit taxes.

Avoiding this forced bankruptcy by tax suggests two possibilities; either these folks will stay in the U.S. -- or they will rearrange their assets and their lives, leave and evade the taxes.

* For all the facts about the U.S. exit tax, you can get my special Expatriation Report here.

* While you can, there still are many legal ways to enjoy privacy, banking and save taxes offshore; Bob Bauman tells you Where To Stash Your Cash. If you're interested in living offshore, The Passport Book is just what you need.

Comments

[Milo]

Here is what I found about attempts to impose a similar exit tax in Europe:

Some European Member States have thought about taxing their residents on unrealized capital gains in respect of their assets when they move their residence to another State.

The European Court of Justice has ruled that immediate taxation of latent capital gains on assets transferred to another Member State infringes the principle of freedom of establishment.

Indeed, taxpayers will be discriminated by being subject to immediate taxation in their Member State of origin on capital gains not yet realised if no such taxation occurs in similar domestic situations.

The Court has also stated that Member States cannot put a disproportionate burden on the taxpayer, such as by imposing bank guarantees or the obligation to appoint a fiscal representative that would guarantee the payment of the tax when the asset is realised in the new home Member State.

However, EC law does not prevent a Member State from assessing the amount of income on which it wishes to preserve its tax jurisdiction, provided this does not give rise to an immediate tax charge and there are no further conditions attached to such deferral, and due account is taken of any reduction in value of the assets after the transfer.

Member States should therefore provide for an unconditional deferral of collection of the tax due until the moment of actual realisation.

Although granting an unconditional deferral may resolve the immediate difference in treatment between taxpayers who move to another Member State and those who remain in the same Member State, it will not necessarily provide a solution for double taxation or inadvertent non-taxation which may arise due to discrepancies between the different national rules.

Double taxation could arise if the exit State calculates the capital gain at the moment of deemed disposal at the time the taxpayer leaves the country and the new State of residence taxes the whole capital gain from the acquisition up to the moment of actual disposal.

Someone should bring the dictatorial and abusive imposition of the US exit tax on non-US citizens to the US High Court of Justice.

At minimum, the application of this law on green card holders should be limited exclusively to foreigners who became US residents after the signing of the law.

Unfortunately green card holders do not have any representation in this country. They cannot vote but just pay taxes. Only duties and no rights!