As a coda to my article on the tax:
The HEART Act, passed on 17 June 2008, substantially modified provisions of the expatriation tax. Since the new law is materially different from the previous, I will attempt to explain the current tax consequences of expatriation.
Under the new expatriation tax law, effective for calendar year 2009, expatriates are treated as if they had liquidated all of their assets on the date prior to their expatriation. Under this provision, the taxpayer’s net gain is computed as if he or she had actually liquidated their assets. Net gain is the difference between the fair market value (theoretical selling price) and the taxpayer’s cost basis (actual purchase price). Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year. Remember that no sale need ever be made by the taxpayer.
The new tax law also applies to deferred compensation (IRAs, 401(a), 403(b) plans, pension plans, stock options, etc.) of the expatriate. If the payer of the deferred compensation is a US citizen and the taxpayer expatriating has waived the right to a lower withholding rate, then the lucky expatriate is slapped with a 30% withholding tax on their deferred compensation. If the expatriate does not meet the aforementioned criteria then the deferred compensation is taxed (as income) based on the present value of the deferred compensation.
Fortunately, expatriates are not forced to remit their pound of flesh in the calendar year of their departure if they elect to take a deferral. These taxpayers can defer the recognition of the tax until they actually sell their assets or die. This may not seem like much of a silver lining but it does help expatriate taxpayers avoid a tax bill which they are financially incapable of paying without actually selling everything they own.