New rules for expats: leaving America with dignity.Congress has debated the merits of various tax measures for expatriates for more than 20 years. The most straightforward approach is an exit tax on all untaxed Adj. 1. untaxed - (of goods or funds) not taxed; "tax-exempt bonds"; "an untaxed expense account" tax-exempt, tax-free nontaxable, exempt - (of goods or funds) not subject to taxation; "the funds of nonprofit organizations are nontaxable"; "income exempt asset appreciation on departure. Fortunately, this complex tax policy has been constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. by civil rights concerns of those who view exit taxes as inappropriate barriers to free population movement, historically used by totalitarian-style regimes to detain de·tain tr.v. de·tained, de·tain·ing, de·tains 1. To keep from proceeding; delay or retard. 2. To keep in custody or temporary confinement: their oppressed op·press tr.v. op·pressed, op·press·ing, op·press·es 1. To keep down by severe and unjust use of force or authority: a people who were oppressed by tyranny. 2. inhabitants
The game is based loosely on the concepts from SameGame. . In spite of this controversy, several enlightened governments, notably Canada and Australia, have recently adopted this approach, with mixed results. The United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. uses another approach ... for now. The world is going global, and the U.S. tax system is keeping up with the times. The American Jobs Creation Act of 2004 (the "Jobs Act") established special rules for individuals emigrating from the United States, including all traditional expatriates--people giving up citizenship--and even certain aliens relinquishing permanent residency Permanent residency refers to a person's visa status: the person is allowed to reside indefinitely within a country despite not having citizenship. A person with such status is known as a permanent resident. . They subject the wealthy to at least 10 years of stricter reporting, and monitor and tax certain post-departure income. The less-wealthy are allowed to leave with minimal fuss, but must report their departure to claim U.S. tax freedom. The U.S. tax system is unique in its global approach to taxation. U.S. citizens always are required to pay income tax on their worldwide income from all sources, subject to various credits, exemptions and exceptions, and any gifts they make or estates they leave are generally subject to U.S. transfer taxes. Enhanced disclosure requirements, an intent-driven tax regime and the inclusion of long-term residents in the anti-avoidance regime tightened these rules in 1996. The chink in the armor in the 1996 revisions was the focus on the taxpayer's intent to trigger the full antiavoidance tax system. Determining intent has proven nearly as costly and elusive as the daunting daunt tr.v. daunt·ed, daunt·ing, daunts To abate the courage of; discourage. See Synonyms at dismay. [Middle English daunten, from Old French danter, from Latin task of determining the fair value of unsold assets at departure. NEW LEGISLATION, NEW RULES The new rules apply to all departing expatriates retroactively ret·ro·ac·tive adj. Influencing or applying to a period prior to enactment: a retroactive pay increase. [French rétroactif, from Latin from June 3, 2004. In addition to the 10-year postexpatriation self-assessment and reporting system, the net-worth threshold also has been increased, exempting more of the "less-than-wealthy" from continuing tax payment and return filing obligations. This will allow those individuals to move freely with no special postdeparture U.S. taxes or reporting responsibilities after an initial filing. Expensive and time-consuming letter ruling requests no longer are required. When citizens (or long-term residents) move to locations where there is a U.S. tax treaty, those provisions also must be considered in determining the individual's U.S. tax reporting obligations. An expatriate Expatriate An employee who is a U.S. citizen living and working in a foreign country. continues to be a U.S. resident for tax purposes, and liable for U.S. tax on worldwide income, until the formal acts of expatriation expatriation, loss of nationality. Such loss is usually, although not necessarily, voluntary. Generally it applies to those persons who have renounced nationality and citizenship in one country to become citizens or subjects of another. According to U.S. and associated reporting are complete. Under the new law, all citizens and long-term residents remain U.S. residents until the later of the day they perform an expatriating act (give up citizenship or green card status) or file an information return with the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. documenting their expatriation and financial status. FITTING INTO THE TAX SYSTEM The United States taxes noncitizens ("aliens") based on their U.S. activities. If an alien's presence in the United States is casual, only U.S. source income is taxable and transfer taxes (on estates and gifts) apply only to specific classes of U.S. assets. The tax profile of aliens changes significantly when they become U.S. residents. For income tax purposes, this is objectively based on immigration immigration, entrance of a person (an alien) into a new country for the purpose of establishing permanent residence. Motives for immigration, like those for migration generally, are often economic, although religious or political factors may be very important. status (the green card test for those that obtain lawful permanent residence) or physical presence (the substantial presence test). For estate and gift tax purposes, residence is based on domicile domicile (dŏm`əsīl'), one's legal residence. This may or may not be the place where one actually resides at any one time. The domicile is the permanent home to which one is presumed to have the intention of returning whenever the purpose . An alien who becomes a resident is subject to the same income tax rules as any U.S. citizen. Most resident aliens Resident Alien A foreigner who is a permanent resident of the country he or she resides, but does not have citizenship. Notes: Resident and non-resident aliens have different filing advantages and disadvantages. can change their residence status freely, leaving the United States at will, with few U.S. tax repercussions repercussions npl → répercussions fpl repercussions npl → Auswirkungen pl . However, resident aliens who hold green cards for 8 of the 15 prior years generally are taxed at departure identically to citizens who relinquish their citizenship. These departing long-term green card holders, and citizens relinquishing their citizenship, are described collectively in the tax rules as "expatriating individuals." CPAs will want to obtain detailed calendars and client case histories for at least five years, and in some cases 15 or more years, when evaluating the potential consequences of expatriation. Using 2005 thresholds, expatriating individuals (a) who have been tax-compliant for at least five previous years and attest To solemnly declare verbally or in writing that a particular document or testimony about an event is a true and accurate representation of the facts; to bear witness to. To formally certify by a signature that the signer has been present at the execution of a particular writing so as to such fact, (b) whose net worth is less than $2 million dollars and (c) who have paid federal income tax (indexed annually) of less than an average of $124,001 (about $400,000 of adjusted gross income for an average taxpayer) for the five years prior to expatriation are exempt from the alternative tax regime. That means they are exempt from the enhanced U.S. source rules, the 10-year requirement and most of the restrictions on return visits to the United States that lead to tax "as if a resident" postexpatriation. To obtain the exemption, they must file form 8854 with the IRS to document the expatriation and provide information about their recent tax history, income and assets. Caution: A termination of U.S. residency during the calendar year requires maintenance of a "closer connection" to another country based on general U.S. tax law or a particular U.S. tax treaty with that foreign country, or absence from the United States for all but 30 days in the postexpatriation calendar year and no reentry reentry n. taking back possession and going into real property which one owns, particularly when a tenant has failed to pay rent or has abandoned the property, or possession has been restored to the owner by judgment in an unlawful detainer lawsuit. as a U.S. resident for three tax years postexpatriation. Certain expatriating individuals are exempt: dual citizens and minors. These exemptions are very narrowly defined, but will be useful to those who are U.S. citizens through an "accident of birth" but have no significant U.S. connections. Provided they follow the required filing and other formalities in relinquishing citizenship, regardless of their financial circumstances, they are permitted to expatriate without the complications described below. A strict rule for these two categories of expatriates is that they may not have been in the United States for more than 30 days in any year during the 10-year period prior to expatriation. Additionally, "dual citizens" must never have been resident based on physical presence and never held a U.S. passport. Minors relinquishing citizenship may not have had U.S. citizen parents at birth and must expatriate prior to turning 18 1/2. WEALTHY EXPATRIATES Wealthy expatriating individuals are subject to taxation of U.S. source income under the "alternative tax regime" that modifies the traditional rules for U.S. income, gift and estate taxation of aliens. They must file form 8854 to start the expatriation process, and annually for 10 years after their departure to document their status. They also may become subject to tax as resident aliens on their worldwide income if they spend any significant time in the United States--more than 30 days per year in most cases and another 30 days on qualified business trips--in any of the 10 tax years postdeparture. If any tax is due in a postdeparture year, they also must file form 1040 or 1040NR to report income and calculate the tax. Note A careful projection of an individual's travel and lifestyle plans and alternatives is required to evaluate the tax risks of expatriation. CPAs should document client expectations to help monitor their actual activities and advise them during the sensitive 10-year postdeparture window. To terminate their responsibilities to pay U.S. tax on worldwide income and to set the clock running on the 10-year period, wealthy expatriates must demonstrate they have been tax-compliant for at least five previous years and file an information disclosure statement with the IRS, describing their act of expatriation and providing financial information. They then become subject to the postexpatriation alternative tax regime for 10 calendar years. In summary, the alternate tax regime * Subjects the expatriate to enhanced U.S. sourcing rules so that certain foreign transactions with U.S. connections are taxable as U.S. income. * Requires annual filings for 10 years post-expatriation. * Imposes expanded estate and gift tax obligations. The wealthy expatriating individual must remain in compliance with the strict physical presence limitations to continue to be taxed solely on enhanced U.S. source income, rather than worldwide income. VISITS TO THE UNITED STATES Expatriates, in order to avoid being taxed on worldwide income, musts ever physical ties with the United States, which is evidenced by presence in the United States for no more than 30 days in each year in the 10-year period after expatriation. A daily calendar with third-party evidence of all travel is essential to prove this. Annual copies of passports also are useful. The 30-day requirement now is absolute, save for one narrow exception: Expatriates who are fully taxable citizens or residents of the country in which they, their spouse or either of their parents were born and are traveling on business for a company that is not owned by their family are allowed an additional 30 days per year. There are no general exceptions to the physical presence restriction, and the repercussions of inadvertent U.S. residency could be catastrophic. Additional days due to medical emergencies, transit delays, diplomat status or for students and teachers no longer are allowed. An expatriate suffering a heart attack while in international transit at a U.S. airport could now confront the eternal question, "Your money or your life?" It might even be wise to consider a hospital jet out of the country. INCOME TAX Some expatriates are subject to taxes on an expanded base of U.S. source income and gains for a 10-year period following expatriation. The principle behind this is that they are taxed on income and gains from assets located in the United States even where general source rules would look to the non-U.S. residence of a nonresident non·res·i·dent adj. 1. Not living in a particular place: nonresident students who commute to classes. 2. . This prevents them from avoiding U.S. taxes by waiting until after they leave to realize built-in gains on U.S. assets. Once the taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. has been determined under the alternative tax regime, it is taxed at the graduated rates applicable to U.S. citizens (unless withholding tax The amount legally deducted from an employee's wages or salary by the employer, who uses it to prepay the charges imposed by the government on the employee's yearly earnings. for nonresidents results in a higher liability). Any liability may be offset by foreign tax credits. ESTATE TAX Generally, a nonresident non-citizen is subject to U.S. estate tax only where U.S. property is held at the time of death. The Jobs Act expanded the estate tax in two important ways. First, under the new objective tests, a wider pool of "wealthy" expatriates is expected to report taxable estates Taxable Estate The total value of a deceased person's assets that are subject to taxation - minus liabilities and minus the prescribed tax-deductible portion of assets left behind by the deceased. during the 10 years after expatriating. Second, where expa U.S. Source of Income--General Rules Nonresident aliens (NRAs) must pay U.S. income tax on * Income connected with a U.S. trade or business. * Most income from personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services. provided in the United States. * Passive income derived in the United States (portfolio interest excluded). * Gain on sale of personal property when the NRA NRA (National Rifle Association of America) organization that encourages sharpshooting and use of firearms for hunting. [Am. Pop. Culture: NCE, 1895] See : Hunting is physically present in the United States on the date of sale. * Gain on sale of real property located in the United States. The new rules state that expatriating individuals also must pay U.S. income tax for the next 10 years on * Dividends paid by controlled foreign corporations Controlled foreign corporation (CFC) A foreign corporation whose voting stock is more than 50% owned by US stockholders, each of whom owns at least 10% of the voting power. (CFCs). * Gain on sale of personal property located in the United States. * Gain on sale of stock of U.S. corporations, CFCs and debt issued by U.S. persons. For estate and gift tax purposes, NRAs must pay U.S. taxes on the transfer of * All real and personal property situated in the United States. * All U.S.-held debt except registered (portfolio) debt. * U.S. cash held physically or in U.S. brokerage accounts Brokerage Account An arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage, which then carries out the transactions on the investor's behalf. . * Foreign corporate stock where the corporation owns U.S. real property. Expatriates also must pay U.S. estate and gift tax for 10 years on foreign corporate stock where the foreign corporation owns U.S. personal property. EXECUTIVE SUMMARY * EXPATRIATES GIVING UP U.S. CITIZENSHIP, or terminating green card status held for 8 of 15 prior years, are subject to new tax rules. Expatriations generally start after a passport or green card is surrendered and a form 8854 is filed to report the event. * SIMPLE EXPATRIATION FOR NONWEALTHY INDIVIDUALS requires the one-time filing of form 8854 to declare that five-year average federal income tax was less than $124,001 (for 2005, indexed) and net worth was under $2 million at departure. * ALL OTHER INDIVIDUALS ARE "WEALTHY" AND must file form 8854 on departure and generally annually for 10 calendar years postdeparture. * FOR 10 POSTDEPARTURE YEARS, "WEALTHY" expatriates must follow special enhanced U.S. sourcing rules for profits on U.S. source gains as well as certain gifts and estates. Tax returns must be filed annually. * TRAVEL TO THE UNITED STATES FOR MORE THAN 30 DAYS (plus an additional 30 days on qualified business trips) could subject an expatriate to tax on worldwide income "as if a resident" for that year. RESOURCES IRS Web site links * International Taxpayer www.irs.gov/businesses/small/international/index.html * International Taxpayer--News and Events www.irs.gov/businesses/small/international/article/0,,id=96628,00.html * Publication 553 (1/2005), Highlights of 2004 Tax Changes www.irs.gov/publications/p553/ch07.html * The American Jobs Creation Act www.irs.gov/businesses/small/international/article/0,,id=132515,00.html * Instructions for Form 8854 (3/2005) www.irs.gov/instructions/i8854/ch01.html * Publication 519 (2003), U.S. Tax Guide for Aliens www.irs.gov/publications/p519/ch04.html * Publication 4261, Do You Have a Foreign Bank Account? www.irs.gov/businesses/small/article/0,,id=122500,00.html * Foreign Bank Account Publication 4261 Is Available in Multiple Languages www.irs.gov/businesses/small/article/0,,id=135606,00.html * IRS and FinCEN Announce Latest Efforts to Crack Down on Tax Avoidance The process whereby an individual plans his or her finances so as to apply all exemptions and deductions provided by tax laws to reduce taxable income. Through tax avoidance, an individual takes advantage of all legal opportunities to minimize his or her state or federal Through Offshore Accounts www.irs.gov/newsroom/article/0,,id=108790,00.html * The Life and Times of a Currency Transaction Report (CTR See click-through rate. ) www.irs.gov/compliance/enforcement/article/0,,id=112228,00.html * FAQs Regarding Penalties www.irs.gov/govt/tribes/article/0,,id=108301,00.html DAVID David, in the Bible David, d. c.970 B.C., king of ancient Israel (c.1010–970 B.C.), successor of Saul. The Book of First Samuel introduces him as the youngest of eight sons who is anointed king by Samuel to replace Saul, who had been deemed a failure. A. LIFSON, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , is a partner at Hays & Company LLP LLP - Lower Layer Protocol (Globally: Moore Stephens Hays LLP), New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , and a member of the AICPA's Tax Legislation and Policy Committee. His e-mail address See Internet address. e-mail address - electronic mail address is dlifson@haysco.com. PETER E. BENTLEY, Esq., is a manager at Hays & Company LLP. His e-mail address is pbentley@haysco.com. |
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