Asset Protection BLOG - Mark Nestmann: Want to Leave the USA? Now, You'll Pay an "Exit Tax" for the Privilege

Should you have to pay an "exit tax" if you want to permanently depart your country?

Nazi Germany and the Soviet Union are two examples of countries that imposed crushing exit taxes. And now, the United States is about to join them.

On December 12, the U.S. Senate unanimously approved a military tax relief bill (H.R. 3997) that would impose an exit tax on U.S. citizens and long-term residents who expatriate (permanently depart) from the United States.

The House of Representatives approved similar provisions earlier this year in bills to amend the alternative minimum tax relief (H.R. 3996) and to end the IRS’s private debt collection program (H.R. 3056).

The exit tax therefore appears to be a "done deal" unless the House fails to insert it in its version of the military tax relief bill, or President Bush vetoes the measure. Neither appears likely.

In most countries, all that's necessary to "expatriate" is to permanently depart. After a prolonged period of non-residence (generally one year or more), you're no longer subject to tax in your former country. And once you establish a domicile (a permanent home) outside your former country, you can avoid whatever inheritance tax to which you might otherwise be subjected.

It's much more difficult for Americans, because Congress, in its infinite wisdom, imposes tax liability based not only on U.S. residence, but also on U.S. citizenship. To permanently disconnect from the U.S. tax system, you must not only leave the United States, but also give up U.S. citizenship.

It is this type of departure that the exit tax bill targets. The provision will require anyone who gives up U.S. citizenship or long-term residence (eight of the preceding 15 years) to pay a tax on all unrealized gains of their worldwide estate. The gains will be assessed based on the fair market value of the assets and the tax due within 90 days of expatriation.

Gains smaller than US$600,000, adjusted for inflation annually, would be exempt.

The proposal would also create an onerous tax regime for most pensions and deferred compensation plans, as well as penalize gifts and bequests made by expatriates to U.S. persons.

The image of a former "fat cat" American living tax-free in some tropical paradise is an irresistible populist target. And while only a few hundred people, many of whom are not wealthy, permanently give up their U.S. citizenship annually, I've long warned that some form of exit tax is inevitable.

And now, it appears to be fait accompli.

The most obvious way to deal with the exit tax is to sell appreciated property and pay the 15% tax on long-term capital gains before you expatriate. Other strategies may also be possible, as discussed in a report I've prepared on this draconian proposal. Click here to learn more.

You'll also need to obtain a passport from another country, if you don't already have one. Click here to learn how you can obtain "instant" citizenship in exchange for an investment or contribution.