Effective for renounced US Citizenship after the 16th day of June 2008, Individuals will be liable for US taxation on their gifts and estate. In the past, these taxable events were only theoretical within HEART, Heroes Earnings Assistance and Relief Tax Act of 2008. Basically, HEART act had no teeth in its enactment towards gifts and estates which meant that estate and gift tax regulations continued to allow a foreign person to make a tax-free gift to a US person, provided the asset is not located within the US. This was true also of large gifts and interest in foreign estates that required reporting to the IRS but were still not taxed.
Under the two recent tax provisions: (1) an exit tax on US persons who renounce their citizenship or residence entitlement (‘green card’), and (2) a tax on “gifts made by such unpatriotic persons to US recipients” will be subject to US taxation, with two exceptions:
(1) gifts or bequests to a US-resident spouse are exempt.
(2). gifts or bequests to US charities are exempt.
Yet an exception to the above exception is life insurance policy benefits, which will not be exempt from US taxation, a major disappointment to the life insurance industry.
A major purpose of the HEART act may have been the shocking increase in the number of US citizens who have renounced citizenship recently. The year 2014 brought a record high of 3,415 renouncements. The Obama Administrations effective global criminal and civil enforcement of foreign asset taxation under the FATCA, Foreign Account Tax Compliance Act, and the US DOJ, United States Department of Justice, sweepingly successful planned campaign against Swiss banks. I suspect that the majority of US citizens renouncing are people with dual citizenship, based on a one parent being a US citizen which gives rise to the child also being a US citizenship or birth within the US giving rise to US citizenship of the child. Thus, the child has the status of being a dual citizen and having almost no connection with the US and/or its benefits. These individuals now seek to renounce because they are paying for two countries’ tax return submissions, harsh penalties for not reporting foreign bank accounts and being told by their non-US home-country of citizenship that their bank account will be closed since the banks themselves cannot afford the compliance costs associated with FATCA reporting. An excellent example of this situation is the current Lord Mayor of London, Boris Johnson born in New York to UK parents, it is an excellent read, see http://www.forbes.com/sites/robertwood/2015/02/15/savvy-london-mayor-boris-johnson-paid-irs-is-now-renouncing-u-s-citizenship/
Now with the implementation of teeth to enforce this HEART act, you may need to contact an international tax attorney for a private consultation to determine who this will affect you in particular and how you may be able to resolve the potential of US taxation or, at least, mitigate the financial burden.
By: Michael B. Nelson, Esq.