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.
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.
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.