MARCH 2000 - Tax considerations in giving up your United States citizenship, and/or relinquishing your "green card"
Since President Clinton took office, a concerted effort has been made to pass punitive legislation aimed at United States citizens who relinquish their United States citizenship. In 1996, the Internal Revenue Code was changed to increase the number of individuals who would be subject to United States income tax for 10 years after they relinquished their United States citizenship. The same tax law change also included in this category foreign nationals who had resided in the United States for 8 years and who either relinquished their "green cards" or allowed them to expire.

In 1997, the United States immigration law was changed to exclude individuals who had relinquished their United States citizenship, or their "green card" from entering the United States. The regulations enforcing the change in the immigration law have not yet been promulgated, and this law has not yet been enforced.

Proposed Tax Legislation

Under current United States tax law if a United States citizen relinquishes their citizenship, or if a foreign national who has lived in the United States for 8 years relinquishes their green card, they will continue to be subject to United States income tax on certain assets for 10 years after renunciation. While punitive, those individuals who sought expert tax advice were able to readily avoid United States taxation.

On October 21, 1999, legislation was introduced in the House of Representatives that would impose additional taxes on the above noted individuals, whether or not there was a tax avoidance reason for relinquishing citizenship or residency. The focus of the legislation is to expand taxation into areas not covered by current law (gift, estate, and trust taxes), and to cover areas of the income tax law that have not been addressed in Treasury regulations.

The most significant part of the legislation deals with the deemed sale of property (similar to the Canadian tax law) on the day the individual relinquishes their citizenship or residency. Under the proposed legislation, all property owned by the individual is deemed sold at fair market value on the day of expatriation, subject to a $600,000 exclusion. The proposed legislation also exempts real property and certain pension assets from the deemed sale rule. If the individual elects to defer the payment of the tax on the deemed sale, they can do so by posting a bond guaranteeing payment of the tax on the future date of sale. Interest will accrue until the deferred tax is paid.

In addition to property currently owned by the individual relinquishing their United States citizenship or residency, the proposed legislation will also tax these individuals beneficial ownership of a trust. The individual's interest in the trust will also be deemed to have been sold as of the date of expatriation.

The new legislation will also impose an inheritance tax on United States citizens who receive gifts or bequests from former United States citizens or residents, subject to a $10,000 exemption.

If the proposed legislation is passed, the effective date will be retroactive to the fall of 1999. Thus, those seeking to relinquish their United States citizenship must not only look at how current tax and immigration law affects them, they must now consider the affect of proposed legislation on not only them, but also on their heirs.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

< back



Expatriate Tax Services LLC, 2000. © All rights reserved.