Tax Article - IRS Changes the Law for Tax ExilesSource: Wall Street Journal 5/28/08 Under the Internal Revenue Code, the income of a U.S. citizen is taxable without regard to the citizen's place of residence, and, significantly, without regard to where the income is earned or produced. Every year, hundreds of US citizens will denounce their citizenship and move abroad in order to eliminate that tax liability and protect their wealth. Previously, tax exiles were required to file a U.S. Tax Return for the 10 years following renouncement. This system also encouraged people to hold onto their U.S. assets until after the 10-year period expired to avoid a high gift tax. Recently, a new law approved by Congress under the Heroes Earnings Assistance and Relief Tax Act of 2008 is determined to close the loopholes that allowed Americans to reduce their tax bills through expatriation. Among the new provisions intended to increase U.S. Tax revenues, U.S. citizens and long-term residents who are terminating their status will be taxed once on their unrealized gains, at current market rates to the extent that the aggregate gain recognized exceeds $600,000 (which will be adjusted for cost of living in the future. Furthermore, a 45% gift tax will be imposed on bequests to residents of U.S. after the tax exile dies. The new legislations will abolish the previous 10-year transition rule that many have used to their advantage. Because the new law also applies to long-term residents, it will capture many foreign executives who have been permanent residents of the U.S. for more than eight years. These individuals may now owe taxes to both their native country and the U.S. However, as in the old system, the new rules are triggered only for individuals with a net worth of $2 million or more, or who owed more than $124,000 in income taxes on average over the past five years, indexed for inflation. Even if one of those conditions is met, the first $600,000 in gains are not subject to the tax. The new law won't take effect until President Bush signs off on the legislation as he is expected to do so. Find out how our expertise in tax and accounting can add value to your business. Email us or call us at 1 (888) 875-9770. |
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