In a recent post, I wrote that the exit tax legislation recently passed by both houses of Congress (and now sent to President Bush for his signature) made U.S. citizens "slaves on the plantation."
Perhaps I overstated my point. In most respects, the new law actually makes it easier for many U.S. citizens and long-term permanent residents to sever all tax obligations to the U.S. government, forever. It also makes it relatively simple for persons who became U.S. citizens through an accident of birth (e.g., by having a U.S. parent or being born on U.S. soil) to end their U.S. tax obligations.
So long as you don't have unrealized capital gains over US$600,000 (including gains in most types of pension and retirement plans), this process of "expatriation" is now much simpler than under previous law. Essentially, all you need to do is to:
- Obtain passport and residence in another country or countries;
- Appear before a U.S. consular officer to swear an oath of renunciation or relinquishment of U.S. citizenship; and
- File a relatively simple form with the to let it know you're no longer a U.S. citizen.
The procedure differs slightly for long-term residents than for U.S. citizens. And, if you're a long-term resident who is not a U.S. citizen, you can actually "opt out" of the exit tax. To do so, you must become resident for tax purposes in a foreign country that has a tax treaty with the United States. You must also inform the IRS of your intention not to waive the benefits of the tax treaty applicable to that country.
This process is much easier than dealing with the previous law, which imposed an "alternative tax regime" for 10 years after a person deemed "tax motivated" gave up citizenship or long-term residence.
However, if you're a U.S. citizen with unrealized gains over US$600,000, and you don't want to sell those assets and pay the tax on them before you expatriate, the exit tax truly is onerous. Its provisions on unrealized gains in retirement plans are particularly unfair. But for anyone else who might wish to expatriate, the new provisions are a breath of fresh air in the sordid 40-year history of anti-expatriation legislation.
One thing is certain. The anti-expatriation laws are unlikely to become any more lenient in the future. Moreover, capital gains taxes are almost certain to increase in an Obama administration. That means exit tax on gains—realized or not—will go up as well.
The clock is ticking for would-be expatriates. If you're seriously considering expatriation, now is probably the best time to begin your planning.
Copyright © 2008 by Mark Nestmann
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