Message to U.S. Expatriates: Pay Up

On June 17, President Bush signed into law a $1.2 billion military tax relief package, which includes an Exit Tax on U.S. citizens and long-term green card holders who expatriate from the United States. The Exit Tax is part of the Heroes Earnings Assistance and Relief Tax Act (HEART) of 2008.

An American citizen or a lawful permanent resident giving up the citizenship or green card is now subject to a tax. The United States is probably the only country on the planet that taxes citizens on their worldwide income, no matter where those citizens happen to live.

Before this tax was introduced it was easy for individuals to renounce their American citizenship or surrender their green card to escape from the global U.S. tax liability. This tax applies to U.S. citizens who expatriate and lawful permanent resident who loose their permanent resident status, voluntarily or otherwise, on or after June 17, 2008.

Those who renounced their American citizenship or lost their permanent residency before this date are outside the purview of this tax. Such persons were treated as citizens or lawful permanent residents if they remained in the country for specific periods.

The exit tax includes a capital gains tax on the unrealized gain in an expatriate’s worldwide assets and a transfer tax on all gifts and bequests from an expatriate to any U.S. person during the life or upon the expatriate’s death if the expatriate:

  • Has an average annual net income tax liability that exceeds $ 139,000, over the past five years subject to some adjustments; or
  • Has a net worth of more than $2 million on the applicable date; and/or
  • Fails to certify under penalty of perjury that he has complied with all federal tax obligations for the past five years.

The exit tax introduces the imposition of what can be described as mark-to-market on the basis that the expatriate sold all his or her worldwide assets for the fair market value on the day before expatriation. The exit tax is subject to an exclusion of $600,000 on the market value of all the assets owned by the expatriate in addition to a few applicable exemptions.

The exit tax applies to any expatriate that:

1. Has an average annual net income tax liability that exceeds US$139,000 adjusted annually for inflation for the five preceding years ending before the date the expatriate loses American citizenship or looses permanent resident status

2. Has a net worth of US$2 million or more on such date

3. Fails to certify under penalty of perjury that he or she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit any proof of compliance the IRS demands.

With the exit tax, Congress has made the most significant change to the anti-expatriation rules since their inception in 1966. In doing so, it has sent a clear message: as American citizens and permanent residents, you have enjoyed many privileges, and if you want to exercise your right to leave, you’ll pay dearly for the privilege.

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