New “Exit Tax” Imposed on U.S. Citizens and Long-Term Permanent Residents
The new “exit tax,” under the Heroes Earnings Assistance and Relief Tax Act of 2008, applies only to U.S. citizens who expatriate and long-term (eight years or longer) permanent residents who lose their status (voluntarily or otherwise) on or after the date of enactment, which was June 17, 2008. The prior tax law continues to apply to U.S. citizens who expatriated and long-term residents who lost their permanent resident status before June 17. The new exit tax may prove to be a major deterrent for wealthy individuals who are considering applying for permanent residence.
The Reed Amendment exclusion ground for U.S. citizens who expatriate to avoid paying U.S. taxes was not repealed or modified (as proposed in some earlier versions of the exit tax). There are no regulations to implement it, however.
The exit tax includes a capital gains tax on the unrealized gain in a covered expatriate’s worldwide assets, and a transfer tax on all gifts and bequests from a covered expatriate to any U.S. person during the life or upon the death of the covered expatriate. A “covered expatriate” is a person who gives up U.S. citizenship or loses permanent resident status (having held it for at least eight of the past 15 years) and who: (1) has a net worth of more than $2 million; or (2) had average U.S. federal income tax liability of more than $139,000 over the past 5 years; or (3) fails to certify under penalty of perjury that he or she has complied with all federal tax obligations for the past five years. There are limited exceptions for dual citizens from birth and persons who expatriate before age 18½.
The exit tax is a major deterrent for wealthy individuals who are considering permanent resident status, and a potentially huge tax penalty for permanent residents who wish to leave the U.S. or have already done so. It is already prompting wealthy individuals who have held permanent resident status for less than eight years to surrender their green cards before they become subject to this tax. In such circumstances, several nonimmigrant visa options permit long-term residence in the U.S. without exposure to the exit tax.