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

Defriending
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. Fundamental Analysis

    The Evolution of Obamacare Since Its Inception

    Find out whether the Patient Protection and Affordable Care Act, also known as Obamacare, has lived up to its lofty projections from 2010.
  2. Investing News

    Obama Floats $10 a Barrel Oil Tax

    President Obama intends to propose a $10 a barrel tax on oil; consumers might have to cough up 25 cents more per gallon.
  3. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  4. Stock Analysis

    China Mobile: Just How Big is It? (CHL, CHU, CHA)

    The story behind China Mobile, the biggest company you might never have heard of.
  5. Markets

    The (Expected) Market Impact of the 2016 Election

    With primary season upon us, investor attention is beginning to turn to the upcoming U.S. presidential election.
  6. Economics

    Trump vs. Bloomberg: How They Compare

    If Bloomberg enters the presidential race how will he compare to billionaire brethren Trump?
  7. Fundamental Analysis

    5 Economic Changes to Expect if a Republican Wins in 2016

    Discover the five most likely economic changes the United States can expect if a Republican wins the presidential election in 2016.
  8. Term

    What Is Section 1231 Property?

    Section 1231 property is depreciable business property that’s held for a year or longer.
  9. Economics

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  10. Investing Basics

    This is What Donald Trump's Portfolio Looks Like

    Find out what Donald Trump's portfolio looks like and gain some interesting insights into the way the billionaire's investment mind works.
RELATED FAQS
  1. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  2. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  3. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  4. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  5. Does a Flexible Spending Account (FSA) cover glasses?

    The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost ... Read Full Answer >>
  6. Are tax brackets adjusted for inflation?

    Each year, the U.S. Internal Revenue Service (IRS) adjusts tax brackets for changes in the cost of living to calculate federal ... Read Full Answer >>
Hot Definitions
  1. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  2. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  3. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  4. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  5. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center