Obama Budget Proposal to “Provide Relief for Accidental Americans”? Will the Proposal to Modify the Expatriation Rules Become Law?
[See follow-on post: The Proposal by the President to Exempt Certain U.S. Citizens from Worldwide Taxation: – Very Small, Select Group– published 18 Feb. 2015]
Every year, the President of the United States, releases his proposed budget. The budget is prepared by his team of advisers at the Treasury Department and is known as the “green book“.
For a complete copy of the proposal, that was released on February 2, 2015, see, General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (Released February 2015)
Buried deep into the proposal of the US$3.99 trillion fiscal year 2016 expenditure plan, is a provision to “provide relief for certain accidental dual citizens.” See pages 282 and 283 of the proposal.
It appears someone is listening in the Administration at Treasury; at least a little bit? Will Congress similarly be interested in such proposals? See, Will Congress Intervene to make USC based Tax Laws More User Friendly to USCs and LPRs Residing Outside the U.S.?
The proposal would not adopt residency based taxation for all U.S. citizens, as exists in the rest of the world, but would exclude certain U.S. citizens from the “mark to market” tax on expatriation (i.e., the “exit tax”). See, “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
Those excluded from the exit tax and the tax to their U.S. heirs or beneficiaries who receive gifts or inheritances (See, The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”) are those individuals who:
- became at birth a citizen of the United States and a citizen of another country,
- at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
- has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
- has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
- relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
- certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.
This would be a significant change from current law. However, the no passport requirement will narrow significantly the number of individuals who may be eligible for this relief; if it becomes law?
Most interesting about the proposal, is that it seems to say these U.S. citizen individuals (who meet all 6 criteria) will not be subject to any U.S. tax as a U.S. citizen. In other words, it seems to say they will be taxed the same as a non-resident alien, which in effect is residency based income taxation for this narrow class of U.S. citizens. The word tax is used generically, to presumably also exclude them from U.S. estate, gift and generation skipping transfer taxes.
The proposal has a window of opportunity that starts to close with time and then shuts in January 1, 2018; i.e., the 2 year period after January 1, 2016. This will mean that those future “Accidental Dual Citizens/Americans” who later learn of their U.S. citizenship, will only have 2 years from the moment they became aware of their U.S. citizenship status. One thing is to know you are a U.S. citizen as you live wherever you may around the world; another is to know and understand the U.S. taxes that are imposed upon you on your worldwide assets.
February 12, 2015 at 8:02 pm
The BIG question here is: Do foreign born children with a US citizen parent also qualify as an accidental U.S. Person? I’m thinking here, for example, of the thousands of Vietnamese citizens with a US serviceman as father as a result of the Vietnam war. I don’t know if Vietnam has signed up to FATCA however.
February 12, 2015 at 11:01 pm
Foreign born children with a U.S. citizen parent (where the parent has resided in the U.S. for a minimum period of time – usually 5 years) are indeed part of the category to whom this proposal would seem to provide relief. These children would have U.S. derivative citizenship. All countries have in essence signed up to FATCA, if they have or not signed a formal IGA. Their institutions will provide information on “U.S. accounts” under FATCA, even if no IGA is signed or approved, in order to avoid the 30% FATCA withholding tax on gross proceeds.
See, http://tax-expatriation.com/2014/04/01/sir-winston-churchill-famous-people-did-he-become-a-u-s-citizen-at-birth-via-derivative-citizenship-did-he-file-u-s-income-tax-returns/
February 19, 2015 at 6:01 pm
he author of this blog entry has made the same mis-interpretation that most bloggers are making. The proposal’s preamble (“Current Law”) and Form 8854 are clear that dual-citizens from birth are already exempt from the exit tax as long as they certify 5 years of tax compliancy. Unfortunately, the “Proposal” section then states “Under the proposal, an individual will not be subject to tax as a U.S. citizen and will not be a covered expatriate subject to the mark-to-market exit tax under section 877A if the individual…” leading many people to mistakenly believe that this proposal is newly creating such an exemption. It is not.
Far down into this article, the author then states:
“Most interesting about the proposal, is that it seems to say these U.S. citizen individuals (who meet all 6 criteria) will not be subject to any U.S. tax as a U.S. citizen. In other words, it seems to say they will be taxed the same as a non-resident alien…”
The author writes as if this is some potential nugget gleaned by reading between the lines. Not at all. This relief of filing as a non-resident alien is exactly what the proposal provides, and _only_ what the proposal provides. It taxes Accidental Americans who relinquish US citizenship as non-resident aliens instead of US citizens. One of the requirements is that one has lived outside of the US for their entire adult lives, which sensibly leads to the relief of being taxed as a non-resident alien. This should be moved to be top and foremost in the article, and replace the incorrect statements about this being a new proposal to escape the exit tax.
February 19, 2015 at 10:04 pm
The Obama proposal is very different from current law, which enables a former U.S. citizen to avoid being a “covered expatriate” and all of the tax consequences that follow therefrom. The President’s Proposal is NOT the Same as Current Law – Section 877A(g)(1)(B).
If the proposal were to become law, there would be much more favorable results for those limited members of the class of individuals who could comply with it; namely, no U.S. tax of any kind (unless the individual had certain U.S. based assets or U.S. sourced income).
August 27, 2015 at 3:22 pm
Very interesting what you write. Then, the proposal works as follows: If you are an “accidental American” meeting the requirements listed above and you expatriate within the specified timeframe, then you will *retroactively* be considered to have been a non-resident alien for US tax purposes. Therefore, even if you had never filed any US tax return, you will still be considered to have been compliant with your filing requirements for the last five years, as long as you had no US-source income during that time, or any other reason which would have necessitated the filing of a US tax return. This in turn allows the expatriating person filing the the Form 8854 to check the box saying yes, they were compliant with all tax filing obligations for the previous five tax years, which often leads to not having even to fill out the section on mark-to-market and expatriation tax. A genuine blessing.
February 19, 2015 at 6:42 pm
Relief from the exit tax for certain accidental US citizens seems to already exist. One example of how that works is from, http://hodgen.com/dual-citizen-exit-tax/ :
Regardless of your financial status, you are not a “covered expatriate” if you satisfy all of the following items [see Section 877A(g)(1)(B), Notice 2009-85, Section 2(B)]:
– You became a U.S. citizen at birth; and
– You also became a citizen of another country at birth; and
– On your expatriation date you “continue” to be a citizen of that country; and
– On your expatriation date you “continue” to be taxed as a resident of that country; and
– On your expatriation date you were not a U.S resident for 10 of the 15 tax years that end with the year that you expatriated.
Note, however, that you will still have to certify that you are up to date with all U.S. tax requirements. Failure to do so will render you a covered expatriate even if you satisfy all of the dual citizenship requirements.
Additionally, US border crossing officials, at least for land crossings, have looked the other way for years on *the law* that says US citizens must enter and exit the US only with a US passport, few applying that law. If *the law wasn’t the law is the law* then how does it all fit in with terms of the new *proposal*?
February 19, 2015 at 9:59 pm
This is a good summary of the requirements of existing law. Section 877A(g)(1)(B). However, it is not the same as the Obama proposal. Current law simply exempts a former U.S. citizen from the “exit tax” provided they meet all of the statutory requirements, including the one that is difficult for many; continue to be a citizen and tax resident of the country where they became a citizen at birth. Any individual who has moved from one country to another, will not be able to satisfy this rule.
Also, current law does not give certainty to the individual that the IRS will not try to challenge the requirement that you complied with Title 26, the U.S. federal tax law. The IRS instructions in this regard, go (in my view) beyond the requirements of the statute when they provide – ” . . . complied with all of your federal tax obligations . . . “: “3. You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.” There is no certainty in this regard, although in practice I have yet to see a case where the IRS has made such a challenge.
Current law does not relieve a USC from U.S. tax obligations under Title 26, while they are a citizen.
The Obama proposal would treat the USC as a non-resident alien, which necessarily means they probably have complied with Title 26, U.S. federal tax laws, by living overseas and having little or nothing to do with the U.S. during their lifetimes. Hence, the facts of these “Obama proposal” cases will provide the individuals with certainty, as they will not be treated as U.S. persons for U.S. tax purposes, and hence their failure to file U.S. tax returns will not jeopardize their status after renouncing citizenship.
February 19, 2015 at 10:46 pm
But, in Point #6 you still must certify that you have filed US tax returns as a non-resident alien. If you have no US-sourced income, then it seems that you don’t aactually have to file the forms. Fine. But if you do have US-sourced income, and if you don’t certify filing as a non-resident alien for the past 5 years, then you have violated Point #6 and are no longer covered by the proposal and are, in fact, now a covered expat who has failed to file as a US citizen on world-wide income. Agreed?
August 27, 2015 at 3:25 pm
Yes, agreed, but there are still many people who will find the proposal helpful (if it becomes law).