It’s perfectly legal for a U.S. citizen to renounce citizenship, and each year nearly 600 Americans do so for a variety of reasons. One of those reasons is to escape paying what they see as onerous U.S. income and inheritance taxes. But a new law makes it much more costly to give up tax obligations with citizenship.
This new tax is complicated, like most IRS codes. But the basic provisions are that anyone renouncing U.S. citizenship will immediately be taxed on all their “unrealized gains.” That is, all stock portfolios, real estate, art, and most other kinds of property and assets will be taxed as though they were immediately being sold at current market rates.
What’s more, anything given or left to any heirs by ex-U.S. citizens will immediately be taxed at U.S. gift rates, currently 45%.
The tax not only applies to U.S. citizens renouncing citizenship but also to long-term foreign residents (green card holders) who give up their residency.
This new tax was signed into law by President George W. Bush in June, 2008, but according to Bob Bauman, Legal Counsel to International Living and to The Sovereign Society, it went largely unnoticed because it was buried in a bill calling for tax benefits for U.S. soldiers and veterans.
“This law was passed under the misleading title ‘The Heroes Earnings Assistance and Relief Tax Act of 2008,’ said Bauman. “That sounds very patriotic, but it puts the U.S. in some bad company. Hitler’s Nazis, apartheid South Africa and the Communist Soviet Union each imposed an exit tax that robbed persecuted departing citizens (Jews, gypsies, political dissidents) with similar confiscatory taxes.”
According to Bauman, the tax applies to any expatriate:
1) with an average annual net income tax liability that exceeds US$139,000, adjusted annually for inflation for the five preceding years before the date of termination of U.S. citizenship or permanent residence, or
2) with a net worth of US$2 million or more on the termination date, or
3) who fails to certify under penalty of perjury compliance with all U.S. federal tax obligations for the preceding five years or who fails to submit any other proof of compliance the IRS demands.
“It is your right to end your citizenship if you so desire,” said Bauman, “but if you decide to exercise that right and any of these rules apply you’ll immediately be taxed on everything you own anywhere in the world, as if all your assets had been sold for their fair market value on the day before your citizenship or residency ended.”
According to the U.S. Department of State, anyone wishing to renounce his or her U.S. citizenship must voluntarily appear in person before a U.S. consular or diplomatic officer in a foreign country and sign an oath of renunciation. You cannot renounce citizenship by mail, through an agent, or while in the United States.
At an InternationalLiving.com conference held last February in Quito, Ecuador, Bauman addressed a packed house of attendees and held an overflow workshop for those seeking ways to legally lower their U.S. taxes.
Grant Perry, director of the Ultimate Event V in Quito, said that the event drew more attendees than any event in the 30-year history of InternationalLiving.com.
“Attendance at this event and the incredible interest among the attendees about Bob’s presentation and workshop seems to show that people in the U.S. are more concerned than ever about conditions in the States,” said Perry. “More people than ever are looking for ways to preserve what little they have left after this global economic crisis and afford a decent lifestyle that includes low taxes and good, affordable healthcare.
“More and more,” said Perry, “that quality of life seems to be priced out of reach for the average American.”
