Global Residence and Citizenship Handbook. Christian H. Kälin

had sold it the day before your expatriation date.

      Gains and allowable losses are taken into account. Tax is imposed on your net gain exceeding US$668,000 if you expatriate in 2013. The federal tax rate on long-term capital gains (those on most assets held more than a year) may now be as high as 23.8%. Most state and local governments impose additional taxes. One observation: many US taxpayers who sustained large capital losses during 2008 still have large capital loss carryovers and these can be taken into account in calculating their exit tax.

      You can elect to defer paying the exit tax on some or all of your assets by making an irrevocable asset-by-asset election to do so until you die or dispose of the asset. You must provide adequate security to the IRS and maintain such security in force.

      In a typical case, a US citizen’s expatriation date is the date on which he or she signs a statement voluntarily relinquishing US nationality or an oath of renunciation before a US consular officer somewhere outside the US even though expatriation is not confirmed until some months later when he or she receives a CLN (Certificate of Loss of Nationality).

      A typical long-term resident’s expatriation date is the date on which he or she files Department of Homeland Security Form I-407 with a US consular officer. You can’t just cut up your green card.

      If you pay any required exit tax (or you are not a covered expatriate) and you live overseas, you will be taxed as a nonresident alien individual provided you do not become a US resident under the substantial presence test by spending too many days in the US. That test generally permits you to spend an average of up to about 120 days a year in the US without being treated as a resident for US tax purposes. Since that test is based on a moving average of days (including partial days) you have spent in the US over a three-year period, you should obtain professional advice on how that test will apply to you.

      You will also have to escape the other tentacles of the “tax octopus” and comply with all US immigration law requirements if you wish to visit the US. You must obtain a visa to enter the US unless your passport is issued by a country that is covered by the US visa waiver program.

      If you are a covered expatriate, the nastiest part of the new law imposes a special new income tax or transfer tax on all covered gifts or bequests exceeding US$14,000 per year that any US citizen, resident or trust receives from you either directly or indirectly at any time after you expatriate. The tax rate will be the highest rate of gift or estate tax imposed at the time of the gift or your death. For those dying after 2012, that rate is 40%. Exemptions apply for gifts or bequests received by your spouse (if he or she is a US citizen) or a qualifying charity. We are still awaiting regulations or other guidance from the IRS as to how this new tax on gifts or inheritances will work. The IRS has deferred the reporting and tax obligations with respect to this tax pending the issuance of guidance. The IRS has also stated that it will provide a reasonable period of time between the issuance of such guidance and the date it prescribes for filing the required reports and paying the tax.

      The new law does not contain any immigration penalty. It is not a ground for denying you a visa or entry into the US. The 1996 Reed Amendment remains in effect but it has never been applied to bar any former US citizen who had expatriated from visiting the US.

      You may still be subject to US Foreign Bank Account Reporting (FBAR) requirements even after you expatriate since these rules may apply to some non-Americans. The FBAR definitions and rules are different from the tax rules.

      One of the unintended consequences of these rules is that some foreigners who might normally consider moving to the US to take long-term employment or start a business are having second thoughts and may decide to move elsewhere instead. A well-advised wealthy foreigner who does move to the US may now be advised to avoid trying to obtain a green card or becoming a US citizen and, if possible, to live in a tax-friendly state with a nonimmigrant visa such as those available to a treaty investor or treaty trader.

      Seven US states do not impose any state or local income taxes; they are Alaska, Florida, Nevada, South Dakota, Texas, Washington (the state, not DC), and Wyoming. The other 43 US states and many of their local governments do impose income taxes on top of those imposed by the federal government. The extra income taxes in at least 10 of these states can now exceed 10% and those imposed on residents of New York City can be as high as about 13%. Many states apply these high tax rates to both ordinary income and capital gains. About half of the states do not impose any extra death tax on top of the federal estate tax; the other half do.

      Prior versions of US anti-expatriation legislation have been unsuccessful in raising meaningful amounts of revenue. The revenue estimates for this legislation are probably grossly overstated. Why then does the US Congress waste so much time and effort trying to pass these types of rules? The real aim of the exercise is apparently not to collect taxes from those who expatriate but to discourage you and others from leaving. Like most governments, the US wants to retain its best-paying “customers.”

      When a US exit tax was first proposed by President Clinton in 1995, the US Treasury Department issued a press release stating that the Clinton Administration aimed at “stopping US multimillionaires from escaping taxes by abandoning their citizenship.” It added that a few dozen of the 850 people who had relinquished their citizenship the previous year did so to avoid paying tax on the appreciation in value that their assets accumulated while they “enjoyed the benefits of US citizenship.”

      Later that year, the staff of Congress’ Joint Committee on Taxation issued a report that ran several hundred pages including eight lengthy appendices. I may be the only person outside of government that read the whole thing. I was fascinated by the following language excerpted from a lengthy letter near the end of Appendix G from Leslie B. Samuels, then Treasury’s Assistant Secretary for Tax Policy, to Kenneth J. Kies, who was then Chief of Staff for Congress’ Joint Committee on Taxation: