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.
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Any suggestions about where to emigrate?
Not to Uruguay. Under US “encouragement” our government now agrees to “share” information about bank accounts and transaction of US citizens with the USofA government.
All for the common good, of course… (“good” as in “good war”).
You can still use cash though…
I’m leaving for France soon, and they have a lot of breaks for expats and taxes, but I’m a citizen of USA and Serbia. Keeping my money in Serbia, where nobody knows what you have or where you have it and you can pay anyone off with 20 bucks to keep it hush. Plus they hate America.
@ CG
I’ve seen active discussions about this in several places, and the truth is that there isn’t really a consensus. The problem is that the US economy is so vast and so big and so globally connected that there isn’t a simple exit strategy.
Countries like the Bahamas with no income tax are over tourist dependent and banking sector dependent in the middle of a crashing global economy ( a similar situation exists with other island countries + Belize ) . China’s economy is big, and they are savings and infrastructure wise much better off than the USA is, but they are communist and heavy into US bonds (like Japan too. Singapore and Korea and other area countries will be taken in whatever direction China’s economy goes ). I’ve herd New Zealand, it’s western, free market, decent financials, hedged on both western and Asian economies, but tax and government spending suck (not nearly as bad as Europe though, and better than Australia ). I’ve herd Canada, it’s strong natural resources base make it much less hyper-inflation prone than the USA is, but it’s tied to the hip with the US economy (Alberta is the best part of Canada). Arab countries: can’t trust the political liberty situation there. Former USSR: same, un-trust-able. Some areas in Baja Sur Mexico are extremely isolated in case of disaster, but the rest of Mexico will probably be politically unstable. Italy is a unique case, a western economy with good infrastructure where it is so easy to bribe people that one can usually buy economic liberty even though it stinks on the economic freedom rankings. Most of the rest of Europe, especially the UK and the glorified “nordic” countries are doomed. Costa Rica: has reasonable financials, will probably ride out the storm. Panama: stability from having no central bank, good privacy laws, and it’s canal makes it hard to mess with without political consequences. Chile: great economic and political freedoms, good financials, strong commodity sector making it inflation-resistant, decent infrastructure, more dependent on Latin countries than on the US, good trade with Asia, taxes aren’t that great though. India: will probably continue to grow, but way too corrupt. Brazil: will probably grow too, is much more developed than India, but poor economic liberties and corruption. Africa: mostly a big unknown, somewhat isolated from the western crash, good commodity base to protect against inflation, the political situation and economic situation varies wildly from country to country, not great infrastructure in most areas.
And finally, the USA: It’s big enough that there are a lot of places to hide and ride out the storm. New Hampshire, most the mid-west, + Colorado, Utah, Idaho, Wyoming, Airzona, Texas, Tennessee, and Alaska will probably fare ok. Nevada has good economic liberties, but is way too tourism dependent, very good for incorporation though – they allow bearer shares and don’t openly share with the IRS. Stay away from NY, Chicago, the beltway, and CA. (Yeah, I’m in CA, some high tech areas + careers in CA will liekly muddle through – God help me) Strongly recommend owing a handgun, food storage, solar, internet + email, and a private mail box – try to keep your name and real address off of anything.
Oh, I forgot Germany. They will probably do much better than the rest of Europe. Sill they are hobbled with a lot of social programs. Switzerland: it seems the rest of Europe is ganging up on them, very bank orientated too, not sure how they will fare.
David C-
Great expat info. Any assessment of Ecuador?
Where to go?
For low income and other taxes, Bermuda, Hong Kong and Singapore.
For an honest country with minimum corruption, go to the 4 Scandinavian countries, Canada and New Zealand.
from an australian point of view, i’m vaguely hopeful that new zealand is at least ending the long labour years and the new pm, john key, has said some sensible things when other leaders were busy making fools of themselves talking “stimulus”. i’d be interested to hear what kiwis think…
It sounds like this change would work in favor of the emigrant, at least during the current depression.
Most wealthy people today saw their assets substantially fall in the last year or two. Suppose I hold real estate or stock I bought long ago for $200,000 which was worth $1 million in 2007. If I sold them today I’d get $300,000. So I emigrate, declare the $100,000 which is below the threshhold for the emigration tax; then in a few years, when (if) the assets regain their earlier value, I sell them with no (US) tax to pay.
What is even worse is that this law applies also to foreigners who have been long term residents in the US and who wish to “repatriate” in their countries of origin.
The law does not make any exceptions and punishes these incorrectly considered “expatriates” as if they wanted to leave the US to avoid US taxes, even if the taxes in the countries where they wish to return are often higher than in the US.
I find this outrageous. This law makes prohibitive for foreigners to return home and deprives allies countries from legitimate tax revenues and the contribution of their citizens.
In addition, I find your comment about the possibility that the law gives to defer the payment of the “expatriation tax” incorrectly benign. In fact, you fail to mention that the “expatriate” will have to pay hefty interest on any deferral. Big deal! What if the “expatriate” has no intention to ever sell his assets, including the house where he/she intend to return leaving in his/her home country?
This law is clearly an abusive and unjustified expropriation when applied to non US citizens who have lawfully resided, worked, and paidd taxes in the US and who want to retire in US allied countries with which the US has taxation treaties.
Leaving the US to move to a tax haven is one thing. Returning to ones’ home country is another. But for the US legislator, who desperately needed to assure funding to the benefits granted to soldiers coming back from Iraq, there is no difference.
No surprise if the world does not like the US!
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