Taxes are a painful reality that everybody has to deal with, and often taxpayers look for ways to trim their bill, up to and including transplanting themselves to a much more tax-friendly environment. However, for some investors, recent developments have made this option significantly less appealing.

SEE: 10 Money-Saving Year-End Tax Tips

On May 17, Senator Charles Schumer introduced the Ex-PATRIOT Act, a legislation which seeks to amend the IRS Code of 1986 and further disincentivize individuals from renouncing their citizenship for tax avoidance purposes. The act, which stands for "Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy," was proposed to the senate as a response to Facebook co-founder Eduardo Saverin's relinquishment of his U.S. citizenship - an action perceived as a means to avoid capital gains taxes he would owe when the company went public.

In part of his reasoning for the bill, Schumer pointedly said that Saverin "… turned his back on the country that welcomed him, kept him safe, educated him and helped him become a billionaire." In response to these allegations, Eduardo Saverin has maintained his position that he will indeed pay the tax he owed and "continue to invest in U.S. businesses and start-ups" and hopes "that those investments will create many new jobs in the U.S. and globally." However, despite Saverin's intentions after the fact, the reality is that wealthy individuals are still able exit the country to avoid taxation, which has pushed lawmakers to amend laws regarding expatriation rules. This will have deep consequences for a small percentage of the U.S. population.

SEE: Capital Gains Tax 101

What the Law Proposes
Currently, the IRS Code of 1986 maintains a provision where any expatriate with a net-worth of $2 million or who, within the past five years, has an average liability of $148,000 in income tax, is deemed to have relinquished his or her status as a citizen, unless a justifiable reason is given. The proposed bill will amend the code and target expatriates who have left the country for the purpose of avoiding taxes, and will subject them to a 30% future capital gains tax. Moreover, the proposed legislation will also amend the Immigration and Nationality Act, denying admissibility into the U.S. for expats who fall under the description outlined in the bill.

As it stands, the current provision prior to the amendment still affects Saverin in that his assets are treated as if he liquidated them before departure, and are taxed accordingly. However, by leaving the country prior to Facebook's IPO, he dodges further taxation on gains.

What Could This Mean to You?
Since 2008, the rate of Americans renouncing their citizenships has increased substantially, with that year seeing 235 individuals doing so to 743 people in 2011. Whether you are an American citizen living abroad or are looking to relinquish your status to adopt a new one, the U.S. necessitates that you fulfill key criteria in order to satisfy tax obligations as spelled out by the IRS. If you fall under the latter of these described expats, and your financial situation mirrors the three statements bulleted here, new amendments to the tax code may make your life a little challenging - especially if you leave for tax purposes. Potentially, it could even mean exile from the United States.

SEE: Tax Tips For The Individual Investor

The Bottom Line
The Ex-Patriot act has supporters and critics from both ends of the political spectrum. Republican House Speaker John Boehner has made favorable statements regarding the new act, while Americans for Tax Reform president Grover Norquist has compared the new amendment to reichsfluchtsteuer, an emigration tax implemented by the Third Reich to dissuade capital flight. Only time will tell whether this new bill has teeth, but in the meantime, those affected by the legislation may want to consider other tax-reduction options.

Related Articles
  1. Investing

    Which GOP Candidate Brings What to the Table?

    What are the major GOP presidential candidates' economic plans and how do they differ?
  2. Retirement

    How Are 401(k) Withdrawals Taxed for Nonresidents?

    As a U.S. nonresident, deciding what to do with your 401(k) after you return home comes down to which tax penalties, if any, you're willing to incur.
  3. Professionals

    Why Near-Retirees Shouldn't Sweat the Volatility

    With the stock market bumpy, some folks nearing retirement might be nervous. Here's how to create some wiggle room for your portfolio.
  4. Economics

    Explaining Corporate Tax

    A corporate tax is a tax levied on the profits a corporation generates.
  5. Taxes

    The 5 Countries Without Income Taxes

    Discover information on some of the best countries to consider relocating to that offer the financial benefit of charging no income tax.
  6. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  7. Retirement

    How Much Can You Contribute to Your 401(k)?

    Given the fairly high compensation limits on these retirement plans, most workers can pitch in more than they currently do.
  8. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  9. Economics

    Benefits of China Changing It's One Child Policy

    China's one-child policy is changing, and investors are looking for ways to cash in. The reform might not have the effects that many anticipate, however.
  10. Taxes

    Countries With The Highest & Lowest Corporate Tax Rates

    The United States is No. 2 in the world for its high corporate tax rate. There are ways around paying it, and many nations with lower rates are worse off.
  1. Why is the Cayman Islands considered a tax haven?

    The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
  2. Why is Panama considered a tax haven?

    The Republic of Panama is considered one of the most well-established pure tax havens in the Caribbean due to extensive legislation ... Read Full Answer >>
  3. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  4. Are Cafeteria plans exempt from Social Security?

    Typically, qualified benefits offered through cafeteria plans are exempt from Social Security taxes. However, certain types ... Read Full Answer >>
  5. Why is Andorra considered a tax haven?

    Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, ... Read Full Answer >>
  6. How are variable annuities taxed at death?

    If the owner of a variable annuity dies before receiving full payment, his beneficiary must pay taxes on any earnings received. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!