The poison in a new proposed tax bill

[Norbert Schlenker]

http://thomas.loc.gov/cgi-bin/query/F?c ... GHh:e41832:

Pay careful attention to the proposed revisions to expat taxes, both for renouncing citizens and emigrating long term residents.

[JohnSt]

Your link doesn't work. Are you referring to the exit tax? That's been kicking around for awhile now. It's mostly relevant to those able to take large gains. There once were ridiculous clauses in these bills about punishing the children of all renunciants (by making any inheritance taxable) and other nicities, but I believe those were stripped out of the recent version that passed the House.

[JohnSt]

Strike what I said!! I missed this nasty blurb, which has recently been changed to apply to all US children of all living renuniciants:

(2) GIFTS AND BEQUESTS- Chapter 15 of the Internal Revenue Code of 1986 (as added by subsection (b)) shall apply to covered gifts and bequests (as defined in section 2801 of such Code, as so added) received on or after the date of the enactment of this Act, regardless of when the transferor expatriated.

Essentially, this seeks to penalize innocent people. If you happen to hold US citizenship and your favorite Great Uncle Harry leaves you his nest egg, you'll be required to pay US tax at the highest tax rate. This, of course, assumes that you know he renounced (back in 1955)! Pity the uninformed who could wind up a border crossing someday only to learn they owe the US government gobs of money. It all seems ludicrously oppresive, and I wonder if this will pass legal scrutiny.

[Norbert Schlenker]

HR3996, passed in the House, being debated in the Senate as I write.

Deemed disposition of all assets at expatriation, 30% confiscated from retirement accounts at expatriation (not clear that a 401(k) would be hit though), gifts back into the US (e.g. to children who don't expatriate) taxable at top marginal rates.

AFAIK this is the only AMT fix bill alive in Congress, so it seems likely that it will go through not much if at all modified.

What a friendly country for aliens.

[JohnSt]

Yeah, I hear you! Norbert, I happened to read your comments about IRS estate taxes (on stocks, ETFs, and mutual funds) over the Financial Webring. Though I'm nowhere near the thresholds, it was still very informative.

Regarding (B) below from H.R.3996, I wonder if you (or nelsona) might be able to interpret the following for me. On one hand, if a renunciant -- let's assume one who holds no US situs assest -- has no obligation to file anything with the IRS (alive or dead!), why would the "timely filed return" exception apply? On the other hand, assuming estate tax forms were filed, would any of the existing exemptions apply to expats? In other words, would all funds inherited by the children of expats by liable for tax, or would a threshold or any exemption apply?

`(2) EXCEPTIONS FOR TRANSFERS OTHERWISE SUBJECT TO ESTATE OR GIFT TAX- Such term shall not include--

`(A) any property shown on a timely filed return of tax imposed by chapter 12 which is a taxable gift by the covered expatriate, and

`(B) any property included in the gross estate of the covered expatriate for purposes of chapter 11 and shown on a timely filed return of tax imposed by chapter 11 of the estate of the covered expatriate.

[Norbert Schlenker]

So it turns out that the Senate took everything out of the bill that might pay for the AMT fix, including all these expat taxes, and passed that version instead. Some sort of compromise will be necessary and it looks like it may not happen until next year sometime, if ever. So we wait ...