- Expatriation: Giving Up Citizenship Or Green Card Can Have Serious Tax Consequences
- October 19, 2008
- Law Firm: Fowler White Boggs P.A. - Tampa Office
- Expatriates have for a long time been penalized by the tax code for abandoning U.S. citizenship. In recent years, those rules have been expanded to include departing long term lawful permanent residents (those holding “green cards” for 8 of the last 15 years). For example, under prior law those affected by the expatriation rules were subject to an alternative tax regime and had to file annual U.S. information returns for ten years after expatriating. If the expatriate spent 30 days in a calendar year inside the U.S. they would be treated as a resident for that entire year.
On June 17, 2008, the Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART”), substantially replaced the old rules for any “covered expatriate” who expatriates after June 17, 2008. A covered expatriate is either (1) a U.S. citizen who relinquishes citizenship, or (2) a long-term resident of the U.S. who ceases to be a lawful permanent resident of the U.S., who (i) had an average annual net income tax liability of more than $139,000 (adjusted for inflation after 2008) for the 5 years before the expatriation, or (ii) has a net worth of $2,000,000 or more at the time of expatriation. There are some exceptions, including some relief for dual citizens or persons who relinquish citizenship before age 18-1/2, but these are narrowly drafted providing minimal relief.
For a covered expatriate, HEART imposes a current U.S. tax as if assets had been sold on the expatriating date. The gain is limited to appreciation occurring while the expatriate was a U.S. citizen or lawful permanent resident, and $600,000 of gain is exempt. When the asset is actually sold at a later date, those gains or losses will be adjusted for the gains or losses taken into account on the deemed sale.
There are special rules including: elections to defer the tax until a particular asset is sold (or the expatriate’s death, if earlier); relief for eligible deferred compensation; certain tax-deferred accounts such as IRAs or health savings accounts are taxed at expatriation; and certain rules relating to trust distributions.
HEART also adds new estate and gift tax rules applicable to U.S. residents receiving a gift or bequest from a covered expatriate. In that case, the recipient will be taxed at the highest gift or estate tax rate then in effect (currently 45%) on the value of the property that is received. The tax is payable by the U.S. recipient, and is reduced by gift or estate taxes paid to a foreign country. Exceptions include: property subject to U.S. estate or gift tax imposed on the covered expatriate; gifts or bequests under the gift tax annual exclusion (currently $12,000); and transfers to a spouse or charity qualifying for the marital or charitable deductions.
Prior law continues to apply to those who expatriated before June 17, 2008 and the ten year look back and related rules still apply.