Expatriation Tax
Encyclopedia
An Expatriation tax is a tax
on persons who renounce their citizenship
or residence
in a country.
taxes its citizens on worldwide income, whether or not they are resident in the United States. To deter tax avoidance by abandonment of citizenship, the United States imposes an Expatriation Tax on those who abandon U.S. citizenship. The tax also applies to green-card holders who abandon U.S. permanent residence, if they have been resident for 8 of the last 15 years, whether or not they are emigrating to avoid tax.
The American Jobs Creation act of 2004, passed by the Republican
-controlled government, amended section 877 of the Internal Revenue Code
of the USA.
Under the new law, any individual who has a net worth of $2 million or an average income tax
liability of $139,000 for the five previous years who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance
reasons and is victim to severe tax laws.
The HEART Act, passed on 17 June 2008, substantially modified provisions of the US expatriation tax. Under the new expatriation tax law, effective for calendar year 2009, expatriate
s are treated as if they had liquidated all of their asset
s on the date prior to their expatriation. Under this provision, the taxpayer's net gain is computed as if he or she had actually liquidated their assets. Net gain is the difference between the fair market value (theoretical selling price) and the taxpayer's cost basis (actual purchase price). Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year. The tax applies whether or not an actual sale is made by the taxpayer, and whether or not the notional gains arise on assets in the taxpayer's home country acquired before immigration to the United States. It is irrelevant that the gains may have partly arisen before the taxpayer moved to the U.S.
The new tax law also applies to deferred compensation (IRAs, 401(a), 403(b) plans, pension plans, stock options, etc.) of the expatriate. If the payer of the deferred compensation is a US citizen and the taxpayer expatriating has waived the right to a lower withholding rate, then the expatriate is charged a 30% withholding tax
on their deferred compensation. If the expatriate does not meet the aforementioned criteria then the deferred compensation is taxed (as income) based on the present value of the deferred compensation.
Furthermore, with certain exceptions expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation are subject to US taxation as if they were U.S. citizens or resident aliens.
imposes a "departure tax" on those who cease to be tax resident in Canada. The departure tax is a tax on the capital gains which would have arisen if the emigrant had sold his assets when he left Canada ("deemed disposition"), subject to exceptions. However, in Canada, unlike the U.S., the capital gain is generally based on the difference between the market value on the date of arrival in Canada (or later acquisition) and the market value on the date of departure.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
on persons who renounce their citizenship
Citizenship
Citizenship is the state of being a citizen of a particular social, political, national, or human resource community. Citizenship status, under social contract theory, carries with it both rights and responsibilities...
or residence
Tax residence
Definitions of residence for tax purposes vary considerably from state to state. For individuals, physical presence in a state is an important factor. Some states also determine residency of an individual by reference to a variety of other factors, such as the ownership of a home or availability...
in a country.
United States
Unlike most countries, the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
taxes its citizens on worldwide income, whether or not they are resident in the United States. To deter tax avoidance by abandonment of citizenship, the United States imposes an Expatriation Tax on those who abandon U.S. citizenship. The tax also applies to green-card holders who abandon U.S. permanent residence, if they have been resident for 8 of the last 15 years, whether or not they are emigrating to avoid tax.
The American Jobs Creation act of 2004, passed by the Republican
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
-controlled government, amended section 877 of the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
of the USA.
Under the new law, any individual who has a net worth of $2 million or an average income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
liability of $139,000 for the five previous years who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance
Tax avoidance
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...
reasons and is victim to severe tax laws.
The HEART Act, passed on 17 June 2008, substantially modified provisions of the US expatriation tax. Under the new expatriation tax law, effective for calendar year 2009, expatriate
Expatriate
An expatriate is a person temporarily or permanently residing in a country and culture other than that of the person's upbringing...
s are treated as if they had liquidated all of their asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s on the date prior to their expatriation. Under this provision, the taxpayer's net gain is computed as if he or she had actually liquidated their assets. Net gain is the difference between the fair market value (theoretical selling price) and the taxpayer's cost basis (actual purchase price). Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year. The tax applies whether or not an actual sale is made by the taxpayer, and whether or not the notional gains arise on assets in the taxpayer's home country acquired before immigration to the United States. It is irrelevant that the gains may have partly arisen before the taxpayer moved to the U.S.
The new tax law also applies to deferred compensation (IRAs, 401(a), 403(b) plans, pension plans, stock options, etc.) of the expatriate. If the payer of the deferred compensation is a US citizen and the taxpayer expatriating has waived the right to a lower withholding rate, then the expatriate is charged a 30% withholding tax
Withholding tax
Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...
on their deferred compensation. If the expatriate does not meet the aforementioned criteria then the deferred compensation is taxed (as income) based on the present value of the deferred compensation.
Furthermore, with certain exceptions expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation are subject to US taxation as if they were U.S. citizens or resident aliens.
Other countries
Some other countries impose similar taxes on long-term residents who abandon residence in the country. For example CanadaCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
imposes a "departure tax" on those who cease to be tax resident in Canada. The departure tax is a tax on the capital gains which would have arisen if the emigrant had sold his assets when he left Canada ("deemed disposition"), subject to exceptions. However, in Canada, unlike the U.S., the capital gain is generally based on the difference between the market value on the date of arrival in Canada (or later acquisition) and the market value on the date of departure.