Despite the hope that President Trump’s Tax Reform would
make it easier for American citizens abroad, over the past 2 months, I have had
the task of breaking the bad news.
Things have actually got worse.
This was my honest message to an audience last Saturday evening at the exclusive City Club at Alphaland – a Private Members Club in the Makati area of Manila.
For many overseas employees, who depended on certain
itemized deductions like tax preparation fees, unreimbursed business expenses
and moving expenses…these are no longer available. More importantly, those hoping for a shift to territorial tax were
terribly disappointed. See more here –
For employers or business owners, the ability to defer taxes
has been completely removed and business owners are faced with a huge bill for
retained earnings. See more here –
So we are seeing a bump in the number of enquiries about
giving a US passport or green card. As
a citizen, what’s involved? Firstly, you
need to have a second passport as you cannot be stateless. Secondly, there’s the immigration side and
the tax side and both can be actioned concurrently.
From an immigration standpoint, the first step is going onto
the US Embassy website and making an appointment to renounce it. Depending on where you are, some embassies
make you return for a second appointment but some are known to accept your US
passport during the first interview. Once
the expatriation (ie the process of surrendering US citizenship) is complete,
the State Department would prepare a Certificate of Loss of Nationality (CLN or
form DS-4083) https://en.wikipedia.org/wiki/Certificate_of_Loss_of_Nationality
The tax side of the expatriation process is a bit more
detailed. Your tax treatment depends on
whether you’re a “covered expat” or not. A covered expat is someone who meets any one of the 3 criteria given
under the Heroes Earnings Assistance and Relief Act (HEART Act) passed in
June 2008. This applies to individuals
who relinquish their US citizenship or long term U.S. residency after June 16,
2008 and who either:
1) have an average annual income tax liability of more than
$155,000 for the five years preceding expatriation;
2) have a net worth equal to or greater than $2,000,000 on
the date of expatriation or termination of permanent residency; or
3) have failed to provide certified compliance with U.S. tax
obligations for the five years prior to expatriation.
An individual who meets one of these criteria is referred to
as a “covered expatriate.” If you are not a covered expat, you need only be up to date with all US tax related filings.
The HEART Act imposes a capital gains exit tax (called a
“mark-to-market” tax) upon the date of departure. A covered expatriate will be
deemed to have sold all his/her worldwide assets at their fair market value on
the day before expatriation. Any capital
gains on the deemed sale are taxed as income in the year of expatriation. There is an option to defer the tax until the
assets are eventually sold, but the expatriate must provide security and pay
interest for the period of deferral.
Possible Consequences of Expatriation
Another concern is that after expatriation, the ability to
gift or transfer property to a U.S. citizen or resident is greatly limited. A tax of up to 40% is imposed on the recipient
of any transfer or gift above the excluded amount of $14,000 per person per
year. This can also cause tax problems
for U.S. beneficiaries of a trust created by the expatriate.
Expatriates may also run into immigration issues when trying
to re-enter the U.S. An amendment to the United States’ Illegal
Immigration Reform and Immigrant Responsibility Act of 1996 called
the Reed Amendment provides that an expatriate can be permanently
refused entry to the U.S. after expatriation if the Attorney General determined
that you expatriated for the express purpose of avoiding U.S. tax liability.
Expatriation can be the right option in many situations but,
as explained above, comes with serious implications and should not be handled
lightly. Please take the time to consult tax and immigration experts before
taking the leap on your own.
Please see my previous articles –