Saturday, August 30, 2014

Expatriation tax...

Expatriation tax...  I just stumbled across the existence of this U.S. federal tax.  Basically it's a capital gains tax on all assets, marked to market, of anyone renouncing their U.S. citizenship (there are some exclusions and limitations).  Apparently the U.S. is one of just five countries (one of which was Nazi Germany!) that have imposed such a tax.

If all that is gobbledegook to you, let me give you a simple example.  Suppose that when you were 25 years old (and a U.S. citizen), you bought $100,000 worth of Google stock.  Now you're 40 years old, you still own that stock (now worth $5 million!), you're disgusted with the Obama regime, and you've decided you want to be a citizen of Singapore instead of the U.S.  So you rent a flat in Singapore, move, and renounce your U.S. citizenship.  The IRS says that you owe capital gains tax on $4.9 million (the increase in your Google stock's value) even though you haven't sold your Google stock.  That means you have to cut a check to Uncle Sam for $735,000!

I see the rationale for this: the tax man wants his cut for anything you've “earned” while you were still a U.S. citizen.  In the example I gave, the stocks are a relatively liquid investment and some could easily be sold to pay the tax bill.  However, the tax isn't limited to liquid assets – it applies equally to illiquid assets like real estate, collectibles, etc.  For individuals with substantial portions of their assets being illiquid, this tax could represent a serious impediment to leaving the U.S. (and the way I found out about this tax was through just such a story). 

But all that aside – this just seems un-American to me.  Voting with our feet is a quintessentially American freedom, and the expatriation tax interferes with that.  The stated purpose of this tax is to prevent the flight of capital (or at least, to reduce the incentives for it) – but a far better way to accomplish that would be to make it more attractive for capital to stay in America.  Putting up barriers isn't the American way...

2 comments:

  1. They just increased the cost to expatriate from $450 to $2350 in a desperate attempt to stop the flood of people giving up their passports.
    Note that the exit tax applies to retirement accounts even those earned in foreign countries. If your pension in another country the tax treaty denies the US the right to tax the accounts until you withdraw the money. The US gets round this by forcing a pretend withdraw.
    You can tell it's incredibly shady since they force you to waive your rights under the tax treaty if you can't pay the money up front!
    Chuck Schumer isn't happy with the current exit tax. He wants to make it more punitive. He wants to increase the tax and prevent those that leave from ever entering the US again. All this to get back at Edwardo Saverin. Remember Schumer said he was going to 'get him'.

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  2. The situation is worse than you describe.

    The 'exit tax' also immediately taxes your retirement savings as if taken as income on the day you leave, and at your top marginal income tax rate (so up to 39.6% -- call it 40%, then). This even though you may not have access to these funds either; as a US citizen living abroad you might be in your home country's plan, where funds cannot (realistically) be withdrawn under any terms until age 55, 60, or 65. As a further kick in the pants, if you gift or bequeath money to any US citizen, years or perhaps even decades later, then the RECIPIENT faces a 40% US tax on everything they receive, even though it is post-tax money from the giver.

    The Reed Amendment allows the US to permanently ban former citizens from ever entering the country again. So far this has not been enforced -- it raises some awkward constitutional questions -- but there are repeated calls for it to be enforced in future; see the proposed Ex-PATRIOT act for more on that. And if that were not enough of a barrier, the 'processing' fee for renouncing US citizenship rises in a couple of weeks from $450 to $2350, and by far the highest renunciation fee of any country on the face of the planet.

    In the past this might have seemed un-American. Today, unfortunately, it appears quintessentially American.

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