USA Exit Tax for Expatriates, Close Call, What Next?

Introduction – During the 2007 legislative year in the USA there was a bill in congress that almost got enacted into law. This bill would have imposed an exit tax on individuals leaving the USA as in no longer being permanent residents or renouncing their citizenships. This bill was referred to as H.R. 3056, "Tax Collection Responsibility Act of 2007. This bill did not pass in 2007. Similar bills were introduced during the last six sessions of the USA congress. There are people bearing down hard to get this bill passed. Since we are now in the end of President Bush term we should watch carefully to see if this bill passes. They may wait until after the election to pass it but still in time. This is a common tactic they use with controversial legislation.

Remember the vast majority of the USA is either: retired, unemployed, in prison, disabled with pension, or works for a government either city, county, state and national. It appears (depending on who you talk to) that only a few million people are left working in the private sector in the USA and many of those are in service industry positions as in "Would you like fries with that". The only people likely to be upset are the retirees and people in the private sector who are fed up and planning to leave. To the other they can care less and this is a way for their government to extract more money to dole out to them so the will be cheering the legislators on.

Why They Leave – There are a number of reasons. The short list would be as follows: Lack of affordable healthcare and drugs in the USA, crime, high cost of living, lack of freedom due to war on terror posture they have taken, dropping real estate prices, declining dollar has eroded confidence in the country, large amounts of bankruptcies, business failures and businesses moving overseas. A general trend is retired people sell their home, cars, furniture and then move living offshore their savings and pensions if any. They find prescription drugs generally do not require a prescription and cost about 35% of what they were used to paying. They find medical care to be far cheaper and find out doctors make house calls for as little as $25.00. They buy a nice home or condo for less than the USA prices although in some countries the recently declined USA prices are actually less. If you are on a fixed income like social security from the USA it is like the government gave you a decrease of 50% since the dollar used to be on par with the Euro five years ago and now it take 1.5 USD to buy one Euro. Panama is on the USD so when a European comes here they get a 50% discount on the real estate, cars etc. Americans have it tough these days. Americans have to worry not only about inflating prices in the offshore market but also the declining dollar. Many have realized this and bought property early on and some have switched their savings to Euros.

What the Almost Passed Legislation Would Have Done – First off let us just get into the general details. If you wish to read the whole bill here is a link: H.R. 3056.

The fine details are meaningless since when the bill is reintroduced it will undoubtedly be different but the general scope of the bill will be the same and that general scope is to deter expatriation and make it economically painful as well. The basic idea was to discourage people from leaving the USA and to collect more taxes. They were imposing a tax of 30% on all assets valued over $600,000 lumped together. This was to be based on fair market value at the time of the expatriation. This 30% would have applied to any unrealized gains from IRA's, pensions plans etc. If you gifted assets same 30% would apply. They also had income levels for past five years and a figure of total indebtedness. Essentially they were saying if you paid this new tax you would not have to be paying IRS taxes for 10 years which is the way it is for expatriates now who renounce their citizenship. The proposed bill would tax those not giving up their citizenships just leaving.

They also were addressing people who still remain USA citizens but just reside out of the USA long term. The actual formulas for years spent outside the USA, dollar amounts etc are not worth much except since they will be different in the next bill but they do show you the direction it is going generally speaking. These things change every time legislation is reintroduced. The way the real estate market is dropping may cause them to reduce the amount from $600,000 to $350,000. We do not know.

They are also going after people who are not USA citizens but lived there eight of the fifteen years before they leave long term. This would be green card holders but could also include those on work visas, long-term college and graduate school students and other types of people may be affected. There are a lot of people who were born in the USA and never lived there as adults or never lived there at all. They may be citizens or green card holders and there is talk of making sure they pay taxes. The penalty is never being able to return to the USA again. So they seem to be imposing some sort of ruling regarding your taxes had to be paid for the past five years (paid not filed).

There are a lot of people outside the USA who have passports from the USA who never ever filed a US Tax Return. This will hit them hard. We are told that 63% of Americans residing abroad never file any tax returns. We can expect an IRS procedure to be part of the process when leaving or entering the USA when this is enacted and they will have power to block your entrance or departure. It is coming just a question of when. Perhaps they will go to full exit visas, which require an IRS clearance. Imagine your friendly IRS agent knowledgeable in all the applicable laws and regulations having power over whether or not you can leave the country. When entering a clearance may also be required. They may confiscate funds you are carrying and go though your luggage looking for more things to seize. Then they can examine your records, passport, computer, cell phone etc. before you get an IRS interrogation. Think we are kidding? How many people would have believed 10 years ago that their laptops and cell phones could be confiscated for no cause when entering the USA or that they could not bring a bottle of water onto the plane. Did you know that up until the early 1970’s people would get on airplanes in the USA with their hunting rifles in cases and lay them down in the aisle. You used to be able to just walk onto planes doing shuttle runs like New York City to DC or San Francisco to Los Angeles and just buy your ticket on the plane. Look at things now. So don’t think IRS clearances are not around the corner. This proposed legislation hints at it starting.

The Good News – Well good news is not a great term but there is a loophole here. The USA is apparently not trying to make the law retroactive. This means if you expatriate before the enactment date of the law you would not be covered by it. Then again we have questions about what constitutes an expatriation. If you own a home in the USA are you an expat? If you have a bank account and a PO Box in the USA are you an expat? If you are working for a corporation abroad are you an expat (think work for your own corporation)? So we would need to read the actual law and see what the definitions are going to be. It does appear that if you are gone and have a residency in another country before the new law (if passed) is enacted then you may be immune from certain of its requirements. If you are thinking of making the move to expatriate before they get a law into force you may be well to cover the basics which are what other countries look for to determine non-residency: Have no real estate in your name, have no bank accounts, no stock brokerage accounts, no phone in your name of any sort, have no car, boat or airplane registered to your name in that country, have no mail box or virtual office. In the new country have a residency, place of residence, phone, bank account, and a postal mail address. The point here is go now while you can. Feel free to contact us regarding residency and citizenship programs in several countries considered to be tax havens.