The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART) was recently passed. The major intent of this was to provide $1.2 billion dollars in tax relief for members of the military, provide for premature retirement plan withdrawals, deal with eligibility for the earned income tax credit, and other provisions.
Part of this Act was also needed to offset the cost by re-writing of the tax consequences of abandoning U.S. citizenship. It was estimated that just shy of 500 Americans renounced their citizenship in 2007. Evidently, many of these individuals felt that the tax advantages of getting beyond the reach of the IRS motivated them to renounce their citizenship and become a citizen of another country.
In general, those who do relinquish their citizenship will be treated as having sold all of their assets for the fair market value on the day before the expatriation date. In that situation, all of their net unrealized gains would be taxable, and the new provision of the Act covers those with a net worth of over $2 million or who had average annual net income tax liability during the proceeding five years of $124,000 ($139,000 in 2008 after adjustment for inflation.)
In addition, the first $600,000 of gain would be tax free (also adjusted for inflation after 2008.). Under prior tax law, after ten years, an expatriate was immune to any gift tax in the United States. There are new rules for the donees who may owe tax on the transfer of funds received from a former U.S. citizen who expatriated. A significant change was that the obligation has passed from the donor to the donee, much like the prior law of many years ago regarding inheritances taxes. In those cases, the estate was not liable for the tax, but rather the inheritor.
This is also similar to an IRA situation where the beneficiary pays income tax on the amount received, but the person who died did not have to pay tax on the funds while they were alive, even though they passed the assets to another person.
In any event, if anyone is considering expatriating or has received funds from an expatriate, it is important to be familiar with the new rules so that there will not be penalties or interest accruing from gifts or transfers.
By: Hyman G. Darling, Esq.
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