The President’s Proposal is NOT the Same as Current Law – Section 877A(g)(1)(B)
Some individuals are mistaken that the Obama proposal to exempt certain U.S. citizens from taxation (including the “mark to market” exit tax), is the same as the exception in IRC Section 877A(g)(1)(B).
It’s not. They are not the same, although they have some similar requirements (e.g., 5 years of certification of U.S. tax law compliance under penalty of perjury).
For a brief discussion on the President’s proposal, see –The Proposal by the President to Exempt Certain U.S. Citizens from Worldwide Taxation: – Very Small, Select Group
IRC Section 877A(g)(1)(B) is not the same as the President’s green book/budget proposal.
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There are important differences. Most importantly, the IRC Section 877A(g)(1)(B) exception requires the individual not only have been a dual citizen (of at least two or more countries) at birth, along with U.S. citizenship; but also continue to reside and be a tax resident of that country, i.e., the country of which they were also a citizen at the time of their birth. This tax residency/dual citizenship rule is necessarily required by IRC Section 877A(g)(1)(B). If the person has moved to another country, they will not be eligible for this treatment and will be subject to the mark to market “exit tax” if they renounce their U.S. citizenship. Their U.S. heirs and beneficiaries will also be subject to the 40% (current tax rate) tax on “covered gifts” and “covered bequests.”
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The President’s proposal (if it ever becomes law) will also apparently exempt all qualifying individuals from any type of U.S. taxation; other than tax that would apply to a “non-resident alien” (which would be no U.S. tax – if the individual had no U.S. source income). Not only would no “exit tax” apply, but so too would no U.S. income tax on their income from their country of residence or any other country outside the U.S. The President’s proposal would also exempt them from all U.S. tax filing requirements (other than the 5 years) and from FBAR filing requirements. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
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Current law does not exempt U.S. citizens from U.S. taxation. Indeed, to qualify for the exception to the “mark to market” tax under IRC Section 877A(g)(1)(B), the individual has to have complied with the provisions of Title 26 (which is a very complex U.S. tax law) for the last 5 preceding tax years. See, Certification Requirement of Section 877(a)(2)(C) – (5 Years of Tax Compliance) and Important Timing Considerations per the Statute
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February 19, 2015 at 10:07 pm
Good catch to spot that the proposal doesn’t say the person has to be a resident and taxed in the same country as their other birth citizenship. I wonder if this is just sloppy writing in the proposal, or intended? If intended, and passed, maybe they would be so kind as to expand Form 8854 and the appropriate law with this wider allowance?
You wrote “If the person has moved to another country, they will not be eligible for this treatment and will be subject to the mark to market “exit tax” if they renounce their U.S. citizenship”. The second part of this statement is not true. They just would not get the dual-citizen exemption of not having to pass the tax liability and net worth tests. If they move to another country, and if they fall below the tax liability threshold and net worth tests, and of course if they also certify the 5 years of tax filing obligations, then they are NOT covered expats and NOT subject to the mark-to-market exit tax.
To say “The President’s proposal would also exempt them from all U.S. tax filing requirements (other than the 5 years) and from FBAR filing requirements” is meaningless and incorrect. It’s not this proposal that exempts them from filing future taxes, it’s the fact that they have relinquished/renounced US citizenship. One only benefits from the proposal after giving up US citizenship and, regardless, once expatriated and clean with the IRS, tax obligations cease. This is not something new offered in this proposal.