[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.
