UPDATE 10 SEP 2018
Gary replied to this same post on the Citizenship Taxation Facebook Group. .
Gary Clueit In the example of the Covered Expat inheritance 40% tax on heirs I gave during the interview, I misstated that there was no credit available for any foreign estate tax or IHT paid, giving the UK as an example. Apparently, the amount due to the IRS can be offset by any amount paid to a foreign country. It makes no difference in my case, since my domicile is a country that has no estate or inheritance tax.
Also, only 4 OECD countries (Japan, South Korea, France, UK) have an estate tax equal to or more than the US. Every other country either has none (including 15 OECD countries), or is at a lower rate than the US. Which means, unless you are domiciled in one of the very few high tax countries, your heirs will still lose a significant portion of their inheritance.
It is one thing to pay death taxes where you are living/domiciled. It is an entirely different matter to have to pay anything to somewhere you once lived, left and paid an exit tax on ALL unrealized gains at the time. And zero credit for any increase in wealth since you departed.
Exceptionalism at its best!
Cross-posted from Citizenshipsolutions
INTRODUCTION
The Internal Revenue Code of the United States imposes worldwide income taxation on ALL individuals who are U.S. citizens or who are otherwise defined as “residents” under the Internal Revenue Code. “Residents” includes those who have a visa for “permanent residence” (commonly referred to as a Green Card). A visa for “permanent residence” is a visa for immigration purposes. Once an individual receives a visa for “permanent residence”
he will be considered to be a “resident” under the Internal Revenue Code. His status as a “resident” for tax purposes continues until he fulfills specific conditions to sever his “tax residency” with the United States. The conditions required to sever “tax residency” with the United States are found in S. 7701 of the Internal Revenue Code. (Basically a Green Card holder can’t simply move from the United States and sever tax residency.)
In the same way that U.S. citizens are subject to taxation on their worldwide income even if they don’t reside in the United States, “permanent residents” will continue to be subject to taxation on their worldwide income until they take specific steps to sever tax residency in the United States. In certain circumstances Green Card holders living outside the United States can avoid filing some of the “forms” that are required of U.S. citizens living abroad.
The steps to sever tax residency are found in S. 7701(b) of the Internal Revenue Code. Those wishing to explore this further are invited to read my earlier posts about Gerd Topsnik: Topsnik 1 and Topsnik 2. Those “permanent residents” who qualify as “long term residents” will be subject to the S. 877A Exit Tax rules if they try to sever tax residency with the United States. It’s probably easier to secure a “permanent residence visa” for immigration purposes, than it is to sever tax residency for income tax purposes.
On September 5, 2018 I had the opportunity to participate in a conversation with Mr. Gary Clueit who has been a permanent resident of the United States for 34 years. The following tweet links to the podcast of the conversation. Anybody considering moving to the United States as a “permanent resident” should listen to this podcast.
A man of uncommon humanity – Gary @Clueit – explains some @USGreenCardLaw (from both tax and immigration perspectives) and why the #GreenCard is "Tax Kryptonite". The S. 877A Exit Tax figures prominently. https://t.co/gUmbBYr1Hx
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 7, 2018
More from Mr. Clueit after the jump …
Mr. Clueit has previously written on how the S. 877A Exit Tax affects his situation. The following two tweets link to posts which capture his writing.
First, from CitizenshipTaxation.ca:
The confiscation of your assets when they leave is only the beginning:"All the Side Effects of being a "covered expatriate" Green Card Holder" #YouCantMakeThisUp! https://t.co/CFmiv3uJ8M via @CitizenshipTax
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 7, 2018
Gary Clueit:
As a long-term GC holder with no way to escape “covered expatriate” status, the article doesn’t really cover all the insidious side-effects. For example, determining the $2M net worth threshold does not cover any assets you might have had before moving to the US, or assets due to bequests from relatives that have never set foot in the US. Even after paying the exit tax on the “deemed sale” of everything you own worldwide, you will have to pay actual capital gains when you do actually sell. And every penny of any bequest or gift you make to someone resident in the US (i.e. a child or grandchild, even if they are not US citizens) is then further taxed at 40% (that they have to pay) with no limit. So, for example, if your net worth is $2.5M on the date of expatriation (i.e. covered expat), you pay the exit tax. Say your wealth increases to $250M AFTER you leave the US – if your heirs live in the US (again, whether citizens or not) and you leave that wealth to them, the entire $250M estate will be taxable to them at 40% regardless of the fact that 99% of your wealth at the time of death was created outside the US.
Even if GC holders decide to stay in the US, they are perpetually screwed. Besides never being allowed to vote (not really an issue since one never desired to be a citizen), though they are still expected to pay taxes on worldwide income. The worst comes at death:
US citizen spouses can transfer or gift an unlimited amount between each other. If you are the spouse of a GC holder the maximum transfer is $149,000 annually.Upon death, a citizen can leave an unlimited amount to their spouse. If your spouse is a GC holder, the max is just over $5M. If you spouse is a nonresident alien, the maximum is $60,000. Amounts above that are subject to 40% estate tax.
There is also the possibility of being caught up in double estate tax issues when you die.
This is the ultimate in taxation without representation – one of the founding principles behind the creation of the US. Tea parties were held!
Second, from the Isaac Brock Society:
A companion to the video: Gary @Clueit explains the "Perils & Pitfalls of Being a #GreenCard Holder" https://t.co/sBzNf0G3MN
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) September 7, 2018
Perils & Pitfalls of Being a Green Card Holder
I am posting this comment of Gary Clueit that appeared on the Robert Wood article couple of days ago. Over the past few months, we have “met” Gary on FB, Twitter etc. Especially the Wednesday Tweet Rally- A group that just keeps on giving!!
by Gary Clueit
continued at the original post here
*******
For more on Green Cards please see the following three articles by John Richardson:
Green Card Holders; the Tax Treaty TieBreaker rules and taxation of subpart F and PFIC income
Green Card Holders, the Tax Treaty Tie Breaker and REporting Forms 8938, 8621, and 5471
Green Card Holders, the Tax Treaty Tiebreaker and Eligibility or Streamline Offshore
Where there’s a will there’s a won’t:
“My estate won’t be inherited by US persons in whole or in part.”
Oops wait, I got the saying wrong. Let me try again.
Where there’s a will there’s no way:
“No way any US person will inherit anything from me.”
I can hear the homelanders saying,
Ungrateful
Don’t let the door hit you on the way out
Good riddance
Doesn’t change the fact that if people were aware of America’s dirty big secret, they would think twice about emigrating there – especially when they have more to potentially lose than gain, making the US virtually a prison.
The 40% tax on gifts and bequests to US persons by ‘covered expats’ is in section 2801. So far, since Jun 2008, the IRS has only managed to get as far as issuing proposed regulations regarding its implementation, published in 2015. Nothing since. The law’s current status is this:
So no way of complying with this until the IRS comes up with a route to compliance — Form 708 and so on. Meanwhile, many of these deferred and supposed tax ‘debts’, potentially more than a decade old, will now be effectively uncollectable, with the money long since spent or the recipients themselves perhaps also expatriated, or dead.
@watcher
Good news so far…for those dead and alive.
@heidi
Indeed. It is almost as if the IRS does not know how (or why) to implement this bonkers piece of legislation.
The exit tax law passed in Jun 2008. I left the US and ditched my own green card in May 2008. The timing was not a coincidence. The loss is the US’s, not mine. Meh.
I am through caring (or trying to be) about how I did not properly care and feed the card of kryptonite but all of this information will be very useful to those who have more recently stepped, many totally unsuspecting, into the US CBT tax quagmire. The worst part for me is the betrayal of the Canadian government and that’s why I’m so grateful for the ADCS lawsuit. If a country deems to create a charter, as Canada did in the 1980s, then it should be vigorously defended from subversives, both internal and external.
Watcher:
“…no way of complying with this until the IRS comes up with a route to compliance — Form 708 and so on. ”
And even if/when the IRS comes up with a route to compliance, it’s only relevant for those who comply, it seems?
Like all the other extraterritorial-taxation laws, the power to enforce is circumscribed by US territorial boundaries. (Though they can of course confiscate any remaining US assets.)
@plaxy
Certainly it depends where your heirs are situated. If they are US residents then there could be a problem as the onus is on them to report on the gift an estate tax form 3520. If they don’t report and a large amount is deposited in their account, questions could be asked by the bank and later by the IRS, and guess what?
No form = penalties. But as watcher says, the covered question is not yet asked.
If US heirs outside the US and they can stay under the radar then there should be no problems.
Heidi: “Certainly it depends where your heirs are situated. If they are US residents then there could be a problem as the onus is on them to report on the gift an estate tax form 3520.”
Yes I see. Maybe that’s partly why the extraterritorial regulations haven’t been finalised – if the aim of the law is to tax the dead LPR’s estate, taxing the US heir is the only way to do that effectively.
Except it’s not effective. A 40% tax on the estate would tend to either make the inheritor renounce or the testator leave the money elsewhere.
I can think of some threatened elephants in Africa or stray dogs in Battersea that could have the benefit. 🙂
Indeed. Unless said US heirs see the light and get themselves out of America, am I right? 🙂
@plaxy
D’accord