Prior to the summer recess for the political conventions, Congress passed numerous bills, four of which contained significant tax law changes. The changes that affect US citizens and Bermuda nationals with investments in the United States are summarised below.

Personal injury and sickness damage awards The bill adds additional restrictions on the exclusion from income of punitive and compensatory damages awarded on account of a non-physical personal injury.

Prior to this bill, individuals who were awarded damages or received payments as a result of termination, downsizing, etc. had successfully excluded such payments from income on the basis that these payments were compensatory damages for mental stress. After years of losses in the courts, the Internal Revenue Service won a significant case concerning termination payments made to former United Airline pilots. This law now codifies the IRS victory and will require all termination payments to be included in income.

Employer provided educational assistance programmes The good news is that the bill provides that an employer who provides an employee with financial assistance for education can exclude up to $5,250 of the assistance from the employee's income. The bill is retroactive to January 1, 1995. Hence, if your employer included educational assistance in your Form W-2, you should immediately file for a refund.

The bad news is that this exclusion will expire on December 31, 1997 and that the exclusion is not available for expenses related to graduate level courses beginning after June 30, 1996.

Credit for adoption expenses Individuals can now claim a $5,000 credit ($6,000 for a child with special needs) for qualified adoption expenses for each eligible child in tax years beginning after 1996. Qualified expenses include adoption and attorney fees, court costs, etc. and could include construction or renovation costs if necessary to meet the needs of a child. The credit is phased out for taxpayers with adjusted gross income over $75,000.

Spousal IRA For tax years beginning after 1996, non-working spouses will be allowed to contribute up to $2,000 a year to a deductible IRA. The deduction is phased out if the working spouse is an active participant in an employer sponsored retirement plan and earns over $40,000.

Renouncement of US citizenship The law, as finally passed, contained changes from that discussed in our September column which was written from draft legislation. The section of the bill taxing appreciation of almost all global property has been significantly diminished and the exemption of the first $600,000 of gains has been deleted.

Now, individuals who renounce their US citizenship after February 6, 1995 will be presumed to have done so for tax avoidance purposes if: The individual's average annual net tax for the five years preceding the termination exceeds $100,000 or; the individual's net worth equals $500,000.

The presumption of a tax avoidance motive also applies to estate and gift taxes within the ten year period. However, the presumption of a tax avoidance motive will not apply to US citizens who terminate citizenship and within one year file a request with the Treasury to rule otherwise.

The law also requires that a Bermuda national who gives up his long-term US residency file a statement with his last US return regarding his identity, foreign residence and global assets and liabilities. A penalty of five percent of the expatriation tax or $1,000 will apply for each tax year in which the failure continues.

Simply, if a Bermuda national has been a lawful permanent resident of the United States for eight of the 15 years preceding termination of residency, he will continue to be subject to US income, estate, and gift tax for ten years thereafter on certain US source assets and income.

Tax compliance Congress recognised that a compliance with this law will present the Treasury with difficulties and directed Treasury to conduct a study of tax compliance by US citizens and green card holders living outside the United States and to submit that report prior to December 31, 1996.

Commentary The law changes dealing with the renouncement of citizenship and/or residency and the new foreign trust rules will have a significant affect on US citizens living in Bermuda and Bermuda nationals living in the United States. As with most tax law changes, there are many unanswered questions that can only be clarified by future regulations. Unfortunately for those who need advice today, decisions must be made. You should, of course, check with your own US tax consultant about how this new legislation will affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is the President of Expatriate Tax Services, PO Box 617, Bernardsville, New Jersey and is associated with GulfStream Financial Ltd. in Bermuda.