The Tax Times: Ten Facts About Tax Expatriation

Wednesday, November 6, 2019

Ten Facts About Tax Expatriation - Part I

Has the passage of ObamaCare with its associated additional 3.8% Obama Care Tax make you feel like leaving the country?

Or perhaps you're so sick of liberal Democrats trying to socialize the United States by taxing wealthy people?

Or maybe you're a naturalized U.S. citizen or permanent resident who has prospered here, but would now like to move back the old country for retirement or to start a new venture?

Whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off.

For those who expatriate after June 16, 2008, the rules are different, since Internal Revenue Code Section 877A applies instead of Section 877. You are subject to an immediate exit tax, which deems you (for tax purposes) to have sold all of your worldwide property for its fair market value the day before your departure from the U.S.

In 1994 a Forbes cover story described how such wealthy Americans as Campbell Soup heir John (Ippy) Dorrance III, the late Carnival founder Ted Arison and Dart Container heir Kenneth Dart had given up their U.S. citizenship and avoided U.S. income or estate tax. Perhaps the most clever was Dart, who managed to come back "home" as the Belize ambassador to the U.S., manning a newly opened Belize embassy in Sarasota, Fla., right where he had previously lived! Since that time, Congress has repeatedly tightened the screws on tax-motivated expatriation.

10 things you need to know about Expatriation:

(set forth below and in two subsequent blog posts)

1. Uncle Sam taxes income worldwide.
The U.S. is unusual in that it asserts the right to tax the worldwide income (and at death assets) of its citizens and those who have become permanent residents. It doesn't matter where you live, where the income is earned, or where else you might pay tax. Yes, you may receive foreign tax credits on your U.S. Form 1040 for taxes you pay elsewhere and those credits will offset some (but typically not all) of the financial burden of paying tax in multiple jurisdictions. But the key point is that if you are a U.S. citizen or a permanent U.S. resident, no matter where you move, Uncle Sam will assert a claim on your wealth. So being a U.S. citizen can be expensive.

2. Expatriating means really leaving.
To even think about putting himself beyond the reach of the Internal Revenue Service, a citizen must give up U.S. citizenship and (in the case of citizens subject to Internal Revenue Code Section 877) severely limit the time spendy in the U.S. to not more than 30 days a year. Under that section, a person who attempts to renounce U.S. citizenship but then spends more than 30 days a year in the U.S. will be treated as a U.S. citizen or resident for that year. You may think no one has ever done this, but many have. Permanent U.S. residents (holding green cards) also pay U.S. tax on their worldwide income. They may find it easier to take the expatriation plunge, particularly if family or business opportunities beckon in their country of origin.

3. The old 10-year window is closed.
Back in 1966 Congress enacted the Foreign Investors Tax Act of 1966, signed into law by Lyndon B. Johnson. Essentially expatriates were subject to U.S. tax on their U.S.-source income at normal U.S. tax rates for a full 10 years following their expatriation. Significantly, though, a person could avoid this tax entirely if he did not have as one of his principal purposes the avoidance of U.S. federal income, estate or gift taxes. Of course few people would admit they had a principal purpose of tax evasion, and the government had a hard time proving it. Suffice it to say that there were lots of people (with good lawyers) marrying foreigners, returning to the country of their birth, etc. The system didn't work very well, and little tax was collected.

"Should I Stay or Should I Go?"