| If you are an international assignee leaving the U.S. or a | | | | for life. Fred is 65. His pension income, according to IRS |
| citizen considering trying to escape the U.S. tax net, | | | | tables, is worth 10 times that, or $3 million. |
| you may be in for an ugly surprise. Giving up your | | | | The rules now in effect require a deemed sale of all |
| citizenship or green card may have a very painful tax | | | | assets at fair market value. If Joe gives up his |
| cost immediately. Congress enacted tough new rules | | | | citizenship, he will recognize gain on the stocks and |
| in mid-2008 targeting high net worth and high income | | | | house. But since his basis in the stocks is nearly the |
| people leaving the country. But the results may not be | | | | market value, his gain likely will be only the $800,000 on |
| entirely what Congress intended. | | | | the house. He will pay capital gains tax as if he sold |
| Background: many executives of non-U.S. companies | | | | the house on the day he gives up his citizenship. So |
| accept assignments in the U.S. which become long | | | | Joe's tax may be only $120,000. The new rules may |
| term. These executives often get a permanent | | | | accelerate the tax a little. |
| resident visa, known as a "green card." In the past, | | | | Giani and Fred, on the other hand, may face tax of |
| they could leave the U.S. and give up the green card | | | | more than $1 million, without having any cash to pay it. |
| without particularly adverse tax consequences. In | | | | The rules of section 877A require recognizing all |
| addition, some tax advisers in the past have | | | | deferred compensation, including that in qualified plans, |
| recommended that U.S. citizens give up their citizenship | | | | as part of the deemed sale. Giani and Fred will be |
| to avoid taxes. | | | | forced to recognize $3 million of ordinary income. Their |
| The new rules, in 26 USC 877A, require that a | | | | Federal tax will be about 35% of this. Further, if they |
| "qualifying expatriate" must recognize gain, and pay | | | | live in a state that imposes tax based on Federal |
| tax, as if he or she sold ALL of his or her assets on | | | | taxable income, they will face state income tax. |
| the day before the move. A qualifying expatriate is | | | | Some elections may be available to reduce the tax for |
| 1) a long term resident holding a green card or a citizen | | | | Giani and Fred. They may elect to face U.S. tax in the |
| 2) with net worth over $2 million or 5-year average | | | | future on their qualified plan income. The election |
| Federal tax over $145,000. | | | | requires the plan to withhold 30% Federal income tax |
| Gain recognized in excess of an exclusion amount | | | | forever on payments from the plan. Fred may get |
| ($626,000 in 2009) is included in the individual's tax | | | | deferral, but his tax each year may be nearly the |
| return for a special tax year ending on the expatriation | | | | same as if he had continued to be a citizen. Giani may |
| date. The income on that return is taxed in the normal | | | | be out of luck: the election is only available for a U.S. |
| manner for a U.S. citizen or resident. These provisions | | | | qualified plan. The plan for Giani's Italian employer may |
| were effective June, 2008. | | | | not qualify, unless that plan elects to be treated as a |
| Let's use as an example three people hit by this. Joe | | | | U.S. plan for this purpose. |
| was born in Chicago and has net worth of $4 million. | | | | All three individuals face tax on deemed or actual sale |
| He's retired, has a $3 million stock portfolio which he | | | | of their houses. But if they moved out and sold, they |
| trades often, and a house he's selling for $1 million for | | | | would be paying the same tax in any case. Fred and |
| which he paid $200,000. Giani is an Italian executive | | | | Joe will also face tax for the next 10 years on certain |
| who has been in the U.S. for 10 years. His pension and | | | | income not otherwise taxed to nonresidents. |
| stock options are worth $3 million, with a zero basis, | | | | What does this mean to you? If you are considering |
| and his other assets are worth $1 million, with nearly | | | | giving up your citizenship to save taxes, it may not |
| the same basis. Fred, born in Houston, has just retired. | | | | work any more. If you are a green card holder, you |
| His net worth is $1 million. But he has many years | | | | need to plan very carefully before giving up that green |
| service with his company, and his guaranteed income | | | | card. In either case, get professional advice from a |
| under the company pension plan is $300,000 per year | | | | CPA or attorney experienced in U.S. international tax. |