Moneywise: Preventing taxpatriation: US citizens who renounce their citizenship for tax purposes could face obstacles
US Expatriates have additional worries. On the week before the 4th of July celebrations in the United States, the land of the free and the home of the brave, I write concerning relevant events for former United States citizens who have relinquished their US citizenship in the last ten years (and are now considered covered expatriates or non-resident aliens), and for those United States citizens and long-term permanent residents (aka green card holders) who are seriously contemplating giving up their US citizenship. The relinquishment of a US passport and citizenship is almost always a very, very difficult decision, particularly for those US citizens (or formers) who were born, or naturalised with more than one citizenship, and reside outside the United States or have close family connections abroad. These individuals have been forced to choose citizenships in order to maintain family harmony, business relationships, and their financial future in a society outside of the US sphere, simply because of life circumstances.
In general, certain US Senators have proposed an amendment to the pending immigration reform bill (and then have more recently moved the amendment to a Homeland Security Bill where it appears to have a better chance of passage into law) that in addition to the expatriation taxes (Exit Tax) in effect, will target those former citizens who have been deemed to expatriate for tax avoidance purposes. The additional penalties are predicated on a burden of proof from the former covered expatriate that he/she did not expatriate for tax reasons. If he/she cannot meet that proof, then, there will be an additional 30% tax on their US source capital gains, a ten-year retroactive application, and a provision that will deny entry into the United States.
There are exceptions to being encapsulated within these amendments. However, this is a very complicated area of US tax law. Virginia La Torre Jeker JD is a 30-year experienced US international tax attorney. Virginia and I are both members of the American Citizens Abroad Professional Tax Advisory Council. She has graciously allowed me to use her detailed analysis of this impending amendment. Space does not allow her entire analysis, however, links to her tax blog are below.
See also, the press release of Senator Jack Reed called, Amendment to Prevent Ex-Citizen Tax Dodgers from Reentering the United States: http://www.reed.senate.gov/news/release/reed-offers-amendment-to-prevent-ex-citizen-tax-dodgers-from-reentering-the-us
If you think this may affect you or your family, I strongly urge you to read Ms La Torre Jeker's blog in the entirety to understand your options.
Urgent News Expatriates Banned from the US? Senators Reintroduce Taxpatriate Bill, June 23, 2013 by Virginia La Torre Jeker JD
Congress is taking notice that expatriations (relinquishing US citizenship or long-term green cards) have been steeply on the rise and that the players are sometimes big ones (such as Eduardo Saverin, Denise Rich and Tina Turner). During the second week of June, three US Senators (Robert Casey (Democrat-Pennsylvania), Jack Reed (Democrat-Rhode Island) and Charles Schumer (Democrat-New York) proposed an amendment to the pending immigration reform bill. Their proposal (Proposal) targets former US citizens (and possibly former long-term green card holders) who are deemed to have expatriated for tax avoidance purposes. The Proposal is a basic carbon copy of the 2012 Ex-PATRIOT Act, which had been introduced in the Senate last year by Senators Schumer, Casey, Blumenthal and Harkin. Last years proposal was short-lived and was dropped by the Senate Committee on Finance. The fact that we are seeing this resurrection being snuck into the immigration reform bill means it stands a greater chance of being passed because it will not be as strongly noticed. At a minimum it is a very clear indication that giving up US citizenship (and possibly green cards held for long periods) will become increasingly more difficult to achieve without a very hefty price tag.
A bit of background is first required. Current US tax rules impose harsh tax consequences on so-called covered expatriates (including an exit tax ). Other draconian tax penalties are assessed on any US persons receiving gifts or bequests from such covered expatriates. Full information about the current expatriation tax regime can be found on my tax blog posting here.
The term covered expatriate means a former US citizen or long-term permanent resident (defined later) (i) with a net worth of at least $2 million (Net Worth Test), or (ii) an average income tax liability of at least $155,000 over the last five years (Tax Liability Test), or (iii) who fails to certify under penalty of perjury that he has met all his US tax obligations for the five-year period prior to expatriation (Tax Compliance Test). This tax certification requirement acts as an effective bar to expatriation for those who have not filed tax returns and met all of their US tax liabilities for the relevant five-year period. A long term permanent resident (sometimes commonly referred to as long-term green card holder) is an individuals who has held a US green card in eight of the last 15 tax years.
The 2013 Proposal
Under the 2013 Proposal, when any one of these tests is triggered, the burden of proof would shift to the covered expatriate to demonstrate to the IRS that his loss of US citizenship did not result in a substantial reduction in taxes. How this would work in practice was not specified, and likely the exception would be the subject of IRS Treasury Regulations. If the expatriate cannot meet his burden of proof, he will be classified as a so-called specified expatriate. If the expatriation did not result in a substantial reduction in taxes then he will not be classified as a specified expatriate and the new and additional draconian expatriation penalty, discussed below, will not apply. As under current law, certain exceptions exist pursuant to detailed rules for those born with dual nationality and those who expatriate before age 18 ½ provided they have had limited US physical presence.
This provision requires the IRS, an already overburdened government agency, to make a decision regarding tax-avoidance for every individual who loses US citizenship and is subject to any one of the Net Worth / Income Tax Liability / Tax Compliance Certification tests, mentioned earlier. Furthermore, it is retroactive and will apply to individuals who meet the covered expatriate definition who have lost US citizenship during the 10-year period prior to the enactment date.
Read the remaining analysis on Expatriation Penalty Tax on US Source Capital Gains
Ten-Year Retroactivity, Banned from Entering the USA by linking here
We thank Virginia for her gracious information sharing. Find out more about Virginia La Torre Jeker J.D., here.
Note: The second Bermuda Economy Talking Point has been added to www.pondstraddler.com
Martha Harris Myron CPA PFS CFP(USA) JP is a Bermudian journalist and cross border financial planning specialist focused on offshore financial perspectives, particularly the challenges for international citizens living, working and straddling the North Atlantic pond: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre. Www.marthamyron.com firstname.lastname@example.org
The opinions expressed in this article are those of the author alone, and not The Royal Gazette. This article is intended for general educational purposes only and cannot be used for specific individual tax, investment, or retirement advice, nor can this article be relied upon for any personal financial planning purposes.
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