The Heroes Earnings Assistance and Relief Tax Act of 2009 (“HEART”), P.L. No. 110-245, adds new IRC Sections: 877A (imposing a “mark to market tax” on asset “sale” net gains) and IRC§2801 adding a “succession tax” (on the receipt by a U.S. person of a gift from a “covered expatriate”.)
Based upon these new taxes, certain “Green-Card Holders” may elect to expatriate. The act of relinquishing their “Green Cards” negates their U.S. domicile under the “intent test” (i.e., they intend to reside in the U.S. indefinitely.) Without the requisite intent, they may not be classified as a U.S. domicile. If the Green Card was held for 8 out of the last 15 years, the foreigner is a “long-term resident” subject to the expatriation rules.
Individuals who relinquish their U.S. citizenship, or whose long-term residency status is terminated (after June 16, 2008) are classified as “covered expatriates” subject to the “mark-to-market” tax and the “succession tax”.
Expatriation by a foreigner, who relinquished their U.S. domicile or long-term resident status, may trigger a “mark-to-market” tax to the expatriate on their assets and a “succession tax” on their gifts (taxed to the gift recipient) if the foreigner’s net worth, or U.S. income tax liability meets certain levels;
1) Net Worth: $2M or more (on the date of expatriation), or
2) $151,000 net income tax liability (2012).
The net income tax liability is the average annual net income tax liability for the 5 preceding years, (ending before expatriation) which exceeds $151,000 (for tax year: 2012).
“Succession Tax” (IRC Section 2801)
A U.S. citizen, or resident alien, is subject to a special transfer tax (a “gift tax”) upon receipt of property by gift, devise, bequest or inheritance from a “covered expatriate”.
‘Mark-to-Market Tax” (IRC Section 877A)
Under the “Mark-to-Market Tax” a covered expatriate is taxed on his wealth at the expatriation date and is considered to own an interest in property that would be taxable as part of his gross estate (for federal estate tax purposes), if they died on the day before the expatriation date.
Under this “expatriation tax”, they are taxed on the unrealized gain in their assets to the extent it exceeds $651,000 (for 2012). (IRC Section 877A), Rev. Proc. 2011-52, Rev.Proc. 2010-40, IRS notice 2009-85.
Special tax rules apply for deferred compensation, tax deferred accounts and interests in non-grantor trusts, which are not subject to the “mark-to-market tax.”