DEPARTURE TAX OR EXIT TAX FROM THE USA

THIS WAS FIRST PART OF THE SEPT 30, 1996 "ILLEGAL IMMIGRANT AND LEGAL IMMIGRANT RESPONSIBILITY ACT"  which was signed by Hillary's husband Bill in the 1996 election. It was originally Republican legislation and i understand that the REPUBLICANS expected President CLINTON to veto it and then Bob Dole was supposed to make a big fuss about Clinton being soft on illegal immigrants.  Clinton surprised them, and then made it part of his next six weeks of campaigning. 

Canada already has the same law and there is no $600,000 exemption.  For gains from the stock market. For those interested, Canada's DEPARTURE TAX applies when a Canadian resident leaves the Country.  He or she does not have to give up their citizenship, just cease being a resident of Canada.  A big difference though is that Canada does not make a departing Canadian pay tax on Pension accounts or on real estate situated in Canada.  A departing Canadian would have to fill in forms T1161 - see it at: http://www.cra-arc.gc.ca/E/pbg/tf/t1161/t1161-07-e.pdf  and then

form T1243 at:  -http://www.cra-arc.gc.ca/E/pbg/tf/t1243/t1243-07e.pdf-

and if a tax is warranted by the T1243, the next form is the T1244 to delay the payment until actual sale of the assets by posting a bond.

The US rules only apply when you expatriate yourself by going to a US consulate or Homeland Security Office, filling out a form and swearing an oath that you are giving up your citizenship.  If you keep your citizenship and continue filing your 1040 tax returns, there is no need to deal with Departure TAX. 

However, it can also apply to someone giving up their green card after having it for 8 years.  The question has been on Page 5 of the 1040NR return for years. (question P on the 1999 1040NR for instance. This form asked for form 8854 to be filled out and you can see the form at:   http://www.irs.gov/pub/irs-pdf/f8854.pdf

and the instructions at http://www.irs.gov/pub/irs-pdf/i8854.pdf for the 2007 return. The 1999 instructions were less draconian but the departure tax has been around for a while.  The rules are just being tightened.

 In other words, the exit tax has been around for a while and the new legislation is only a further refinement of prior legislation that changed other times over the years with the last one before this being June 3, 2004.
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This was prompted by an email from one of our readers.  He sent along a newsletter on the topic by Dr David Tanzer.  I have since contacted David Tanzer and received his permission to send this out to all of our lists.

So here it is.  Note, that if you are a US expatriate or just interested in this, David Tanzer also has a free newsletter which you subscribe to at the bottom (where else?).  Interestingly, My interest is US Mexico, US Canada and Canada Mexico.  Dr, Tanzer has his interests in Australia and New Zealand, something I used to be heavily in to in the 1980's but have hardly touched since about 1996.
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DAVID TANZER's Letter follows:

 It’s (almost) official: An Exit Tax in America

 Congress passed a new federal law taxing the free movement of people across America’s borders. President Bush has made it clear that he will sign it.

 Why do Americans just mindlessly go along with more regulations and intrusions into their personal lives like lemmings going off the cliff? An earlier newsletter discussed border controls affecting Americans leaving & re-entering the U.S. Next on the agenda: Currency restrictions? 

 If you believe this is mere hyperbole, read on.

 Even if you have no intentions of leaving America, you will be harmed by this draconian new prohibition against the free movement of people and money across America’s borders. I’ll explain why in a moment, but first here’s how the new Exit Tax tightens the grip on Americans choosing to live outside of the U.S., and giving up their citizenship. If the details aren’t your bag, skip ahead to see how this will still affect you.

 The Heroes Act

 Americans continue to tolerate increased intrusions into everyday private affairs and heightened regulations against the free movement of people and currency….. border controls, and now an Exit Tax.

 Under the pretense of the Heroes Act – officially the Heroes Earning Assistance and Relief Tax Act of 2008 – Title III imposes an exit tax on U.S. persons or long term residents who expatriate from America.

 The Declaration of Independence cites the right to expatriate as a fundamental "law of nature." And the U.S. Constitution guarantees the right to end U.S. citizenship, to live and travel abroad freely, and to acquire second citizenships from other nations. All of these rights have been affirmed by the U.S. Supreme Court. It’s the law.

 No matter that free trade and open trade policies are good for a nation and the economic wellbeing of global society. No matter …… this American Congress and President don’t have time for such meaningless trivia.

 The Exit Tax works as though you have died. It’s calculated similarly to the Federal Estate Tax. It requires American taxpayers to identify all assets and debts to determine their net worth, and then to compute a theoretical gain or loss on all assets. 

 The Exit Tax applies to anyone with a net worth of more than $2 million. It also applies to a taxpayer whose average U.S. income tax liability for the past five years is above approximately $124,000. Net worth is without inflation adjustment, which means increasingly more individuals will fall victim. It treats all property as being sold, and all deferred income retirement accounts as being distributed.

 There is an exclusion of $600,000 for any unrealized gain or deferred income. Then a 30% withholding tax is automatically withheld before deferred income accounts are distributed.

 It also imposes a separate tax on gifts and bequests to family or anyone else, from expatriates, exceeding $10,000, and payable by the recipient of such gift or bequest. (If you wish to see a copy of the Act, drop me an email.)

 The Exit Tax is dramatic and it happened very quickly. It was introduced on May 16, 2008, passed by the House on May 20^th, and passed by the Senate on May 22nd, all within 6 days. True, certain members of Congress have been trying for years to push this draconian law against the free movement of people and property, but in the past it met with justifiable opposition. I wrote earlier in Offshore Living & Investing that the Exit Tax was the next inevitable step, and here it is.

 But worse yet, there is already a federal law prohibiting the right to visit family or friends in the U.S., for persons the government decides have renounced citizenship for tax purposes (8 USC 1182(a)(10)(E)). As of yet it has not been enforced by the Attorney General. And no matter, the law is arguably unconstitutional and contrary to U.S. Supreme Court decisions, it is still law today.

 With the creation of the Department of Homeland Security (DHS) and “No-Fly” restrictions against listed persons, the next logical step is enforcing the existing law prohibiting re-entry into the U.S., and instituting currency restrictions.

 The U.S. has joined the ranks with the likes of regimes imposing notorious departure taxes that stripped Jews of their property before they were allowed to escape Nazi Germany. And it rings a familiar tone to oppressive Russian citizens fleeing the Soviet Union, and the apartheid-era South Africa.

 You can tell a country by the company it keeps.

 These draconian regulations have a drastic effect on all Americans, even if they are not intending to pack up and leave, or send their monies to safer ports offshore.

 Why the Exit Tax is Horrible for all Americans

 Even if you don’t plan to leave America, why is the Exit Tax still bad for you?

 Neither Congress nor the President - or either of the candidates for President - has any grasp of what free market economics means. Look at the economy and the government … a real mess! The greater the problem, the more they believe they can regulate themselves out of economic, political and social problems. And it’s unlikely that it will get better any time soon.

 The Government will continue to become disparate for more revenue with unfunded Social Security, Medicare and Medicaid expenses. There is a need for more taxes for the failed pay-as-you-go systems with fewer, younger-aged workers to pay taxes for the increasing needs of a larger number of retiring baby boomers.

 Regulations on the free movement of people and money are all examples of protectionism. Virtually all modern economists agree that protectionism is harmful, and free trade is in the long-term best interest of everyone. Adam Smith long ago famously warned against protectionism.

 What is protectionism? And why worry about protecting your assets?

 Protectionism is the policy of restraining activities or trade between nations for the purpose of attempting to “protect” the economics within a country. This occurs through methods such as regulations, prohibitions, tariffs, restrictive quotas, and a variety of other restrictive government regulations. Protectionism is closely aligned with anti-globalization, and is contrary to free-trade where there are no artificial barriers to entry or exit.

 Today, it is the stated policy of most First World countries to eliminate protectionism through free trade policies. Despite this, the U.S. is compelled to create fresh, new protective regulations, believing it can regulate itself out of its mess.

 Nearly all economists today are supporters of free trade, because economic theory demonstrates that gains from free trade outweigh any losses. The free movement of people and property is born out by the facts that it creates more jobs – and ultimately more taxes - than it destroys, because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.

 To the contrary, protectionism results in a welfare system which provides no long-term benefits.

 Well-known economists, such as Milton Friedman, Ludwig von Misses, David Ricardo and Paul Kurgan argue that free trade helps third-world workers, even though they are not subject to the stringent health and labor standards of developed countries. This is because "the growth of manufacturing has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions.

 And Alan Greenspan, former chair of the Federal Reserve, criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."

 Looking back through American and European history, each time it was implemented, it caused even greater economic hardship to the economy.

 Protectionism has also been accused of being one of the major causes of wars in the 17th and 18th centuries among European countries, whose governments were predominantly mercantilists and protectionists. The American Revolution - which came about primarily due to British tariffs and taxes – and the protective policies preceding World War I and II, were not good for America….. nor were the economic impositions leading up to the American Civil War.

 And when people and property cannot move freely across borders, armies will.

 In the long run, protectionism steps - as witnessed by Exit Taxes, Border Controls, Privacy Intrusions, Currency Regulations, and other encumbrances - offer no advantage to Americans. This is why it's essential you take steps to learn about protecting your assets before it’s too late.

 Vote with Your Feet

 Each new regulation sets the stage for the next step in the prohibition of the free movement of people and property.

 History teaches us that when people move elsewhere to realize their dreams and ambitions, the typical response for a government is to impose exchange controls. This is painfully evident even during our lifetime, as witnessed in South Africa and in Russia, and the generation before us in Hitler’s Germany. 

 And in the past century, more people fled from Europe and Latin American countries to the U.S. to better their financial lot and avoid burdensome taxes back home than for any other reason, including religious or political freedom. Flight is a natural response to governments that mismanage internal affairs.

 People vote with their feet when they wish to improve their life. People move their families and hard-earned assets to new horizons to avoid oppressive government. Money and people move to where they are treated best. Avoiding oppressive taxation and mismanaged government is a motivating force for people to pack up and leave.

 It’s only natural that as more Americans become aware of the increasing number of restrictions on their freedom of movement, and prohibitions on their personal property, more and more will take action to move before things get worse. And that’s why an increasing number of smart individuals learn about offshore living and investing while there is still time.

 By official count, this past year over 250,000 Americans left the U.S. to other horizons, for many different reasons.

 As more people head for the exits, it becomes increasingly crowded and more restrictive. And as more people leave, the more oppressive a government becomes with restricting the free movement of people and property. And the protectionism spiral only worsens as economic problems choke the system.

 Instead of more restrictive regulations, Congress needs to fix the American system, and fix it fast. An increasing number of Americans are looking for the American Dream offshore. For some, they believe it is already too late.

 Will the last one leaving please turn out the lights?

 Until next time.

  David Tanzer

 David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)

 For more information visit www.DavidTanzer.com or email to Datlegal@aol.com. David is the author of “How to Legally Protect Your Assets” and “Offshore Living and Investing.”

David A Tanzer & Assoc., PC.
Datlegal@aol.com
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www.DavidTanzer.com

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(C) Copyright 2008 David Tanzer all rights reserved.

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

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Copyright  © 1996-2008 david Ingram Updated August 7, 2008, All rights Reserved