US EXIT (departure) tax more draconian than 's - Dr David Tanzer Form 8854 - T1161 - T1243 - T1244 -

DEPARTURE TAX OR EXIT TAX FROM THE USA

THIS WAS FIRST PART OF THE SEPT 30, 1996 "ILLEGAL IMMIGRANT AND LEGAL IMMIGRANT RESPONSIBILITY ACT"  which was signed by Hillary's husband Bill in the 1996 election. It was originally Republican legislation and i understand that the REPUBLICANS expected President CLINTON to veto it and then Bob Dole was supposed to make a big fuss about Clinton being soft on illegal immigrants.  Clinton surprised them, and then made it part of his next six weeks of campaigning. 

Canada already has the same law and there is no $600,000 exemption.  For gains from the stock market. For those interested, Canada's DEPARTURE TAX applies when a Canadian resident leaves the Country.  He or she does not have to give up their citizenship, just cease being a resident of Canada.  A big difference though is that Canada does not make a departing Canadian pay tax on Pension accounts or on real estate situated in Canada.  A departing Canadian would have to fill in forms T1161 - see it at: http://www.cra-arc.gc.ca/E/pbg/tf/t1161/t1161-07-e.pdf  and then

form T1243 at:  -http://www.cra-arc.gc.ca/E/pbg/tf/t1243/t1243-07e.pdf-


and if a tax is warranted by the T1243, the next form is the T1244 to delay the payment until actual sale of the assets by posting a bond.

The US rules only apply when you expatriate yourself by going to a US consulate or Homeland Security Office, filling out a form and swearing an oath that you are giving up your citizenship.  If you keep your citizenship and continue filing your 1040 tax returns, there is no need to deal with Departure TAX. 

However, it can also apply to someone giving up their green card after having it for 8 years.  The question has been on Page 5 of the 1040NR return for years. (question P on the 1999 1040NR for instance. This form asked for form 8854 to be filled out and you can see the form at:   http://www.irs.gov/pub/irs-pdf/f8854.pdf

and the instructions at http://www.irs.gov/pub/irs-pdf/i8854.pdf for the 2007 return. The 1999 instructions were less draconian but the departure tax has been around for a while.  The rules are just being tightened.

 In other words, the exit tax has been around for a while and the new legislation is only a further refinement of prior legislation that changed other times over the years with the last one before this being June 3, 2004.
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This was prompted by an email from one of our readers.  He sent along a newsletter on the topic by Dr David Tanzer.  I have since contacted David Tanzer and received his permission to send this out to all of our lists.

So here it is.  Note, that if you are a US expatriate or just interested in this, David Tanzer also has a free newsletter which you subscribe to at the bottom (where else?).  Interestingly, My interest is US Mexico, US Canada and Canada Mexico.  Dr, Tanzer has his interests in Australia and New Zealand, something I used to be heavily in to in the 1980's but have hardly touched since about 1996.
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DAVID TANZER's Letter follows:

 It’s (almost) official: An Exit Tax in America

 Congress passed a new federal law taxing the free movement of people across America’s borders. President Bush has made it clear that he will sign it.

 Why do Americans just mindlessly go along with more regulations and intrusions into their personal lives like lemmings going off the cliff? An earlier newsletter discussed border controls affecting Americans leaving & re-entering the U.S. Next on the agenda: Currency restrictions? 

 If you believe this is mere hyperbole, read on.

 Even if you have no intentions of leaving America, you will be harmed by this draconian new prohibition against the free movement of people and money across America’s borders. I’ll explain why in a moment, but first here’s how the new Exit Tax tightens the grip on Americans choosing to live outside of the U.S., and giving up their citizenship. If the details aren’t your bag, skip ahead to see how this will still affect you.

 The Heroes Act

 Americans continue to tolerate increased intrusions into everyday private affairs and heightened regulations against the free movement of people and currency….. border controls, and now an Exit Tax.

 Under the pretense of the Heroes Act – officially the Heroes Earning Assistance and Relief Tax Act of 2008 – Title III imposes an exit tax on U.S. persons or long term residents who expatriate from America.

 The Declaration of Independence cites the right to expatriate as a fundamental "law of nature." And the U.S. Constitution guarantees the right to end U.S. citizenship, to live and travel abroad freely, and to acquire second citizenships from other nations. All of these rights have been affirmed by the U.S. Supreme Court. It’s the law.

 No matter that free trade and open trade policies are good for a nation and the economic wellbeing of global society. No matter …… this American Congress and President don’t have time for such meaningless trivia.

 The Exit Tax works as though you have died. It’s calculated similarly to the Federal Estate Tax. It requires American taxpayers to identify all assets and debts to determine their net worth, and then to compute a theoretical gain or loss on all assets. 

 The Exit Tax applies to anyone with a net worth of more than $2 million. It also applies to a taxpayer whose average U.S. income tax liability for the past five years is above approximately $124,000. Net worth is without inflation adjustment, which means increasingly more individuals will fall victim. It treats all property as being sold, and all deferred income retirement accounts as being distributed.

 There is an exclusion of $600,000 for any unrealized gain or deferred income. Then a 30% withholding tax is automatically withheld before deferred income accounts are distributed.

 It also imposes a separate tax on gifts and bequests to family or anyone else, from expatriates, exceeding $10,000, and payable by the recipient of such gift or bequest. (If you wish to see a copy of the Act, drop me an email.)

 The Exit Tax is dramatic and it happened very quickly. It was introduced on May 16, 2008, passed by the House on May 20th, and passed by the Senate on May 22nd, all within 6 days. True, certain members of Congress have been trying for years to push this draconian law against the free movement of people and property, but in the past it met with justifiable opposition. I wrote earlier in Offshore Living & Investing that the Exit Tax was the next inevitable step, and here it is.

 But worse yet, there is already a federal law prohibiting the right to visit family or friends in the U.S., for persons the government decides have renounced citizenship for tax purposes (8 USC 1182(a)(10)(E)). As of yet it has not been enforced by the Attorney General. And no matter, the law is arguably unconstitutional and contrary to U.S. Supreme Court decisions, it is still law today.

 With the creation of the Department of Homeland Security (DHS) and “No-Fly” restrictions against listed persons, the next logical step is enforcing the existing law prohibiting re-entry into the U.S., and instituting currency restrictions.

 The U.S. has joined the ranks with the likes of regimes imposing notorious departure taxes that stripped Jews of their property before they were allowed to escape Nazi Germany. And it rings a familiar tone to oppressive Russian citizens fleeing the Soviet Union, and the apartheid-era South Africa.

 You can tell a country by the company it keeps.

 These draconian regulations have a drastic effect on all Americans, even if they are not intending to pack up and leave, or send their monies to safer ports offshore.

 Why the Exit Tax is Horrible for all Americans

 Even if you don’t plan to leave America, why is the Exit Tax still bad for you?

 Neither Congress nor the President - or either of the candidates for President - has any grasp of what free market economics means. Look at the economy and the government … a real mess! The greater the problem, the more they believe they can regulate themselves out of economic, political and social problems. And it’s unlikely that it will get better any time soon.

 The Government will continue to become disparate for more revenue with unfunded Social Security, Medicare and Medicaid expenses. There is a need for more taxes for the failed pay-as-you-go systems with fewer, younger-aged workers to pay taxes for the increasing needs of a larger number of retiring baby boomers.

 Regulations on the free movement of people and money are all examples of protectionism. Virtually all modern economists agree that protectionism is harmful, and free trade is in the long-term best interest of everyone. Adam Smith long ago famously warned against protectionism.

 What is protectionism? And why worry about protecting your assets?

 Protectionism is the policy of restraining activities or trade between nations for the purpose of attempting to “protect” the economics within a country. This occurs through methods such as regulations, prohibitions, tariffs, restrictive quotas, and a variety of other restrictive government regulations. Protectionism is closely aligned with anti-globalization, and is contrary to free-trade where there are no artificial barriers to entry or exit.

 Today, it is the stated policy of most First World countries to eliminate protectionism through free trade policies. Despite this, the U.S. is compelled to create fresh, new protective regulations, believing it can regulate itself out of its mess.

 Nearly all economists today are supporters of free trade, because economic theory demonstrates that gains from free trade outweigh any losses. The free movement of people and property is born out by the facts that it creates more jobs – and ultimately more taxes - than it destroys, because it allows countries to specialize in the production of goods and services in which they have a comparative advantage.

 To the contrary, protectionism results in a welfare system which provides no long-term benefits.

 Well-known economists, such as Milton Friedman, Ludwig von Misses, David Ricardo and Paul Kurgan argue that free trade helps third-world workers, even though they are not subject to the stringent health and labor standards of developed countries. This is because "the growth of manufacturing has a ripple effect throughout the economy" that creates competition among producers, lifting wages and living conditions.

 And Alan Greenspan, former chair of the Federal Reserve, criticized protectionist proposals as leading "to an atrophy of our competitive ability. ... If the protectionist route is followed, newer, more efficient industries will have less scope to expand, and overall output and economic welfare will suffer."

 Looking back through American and European history, each time it was implemented, it caused even greater economic hardship to the economy.

 Protectionism has also been accused of being one of the major causes of wars in the 17th and 18th centuries among European countries, whose governments were predominantly mercantilists and protectionists. The American Revolution - which came about primarily due to British tariffs and taxes – and the protective policies preceding World War I and II, were not good for America….. nor were the economic impositions leading up to the American Civil War.

 And when people and property cannot move freely across borders, armies will.

 In the long run, protectionism steps - as witnessed by Exit Taxes, Border Controls, Privacy Intrusions, Currency Regulations, and other encumbrances - offer no advantage to Americans. This is why it's essential you take steps to learn about protecting your assets before it’s too late.

 Vote with Your Feet

 Each new regulation sets the stage for the next step in the prohibition of the free movement of people and property.

 History teaches us that when people move elsewhere to realize their dreams and ambitions, the typical response for a government is to impose exchange controls. This is painfully evident even during our lifetime, as witnessed in South Africa and in Russia, and the generation before us in Hitler’s Germany. 

 And in the past century, more people fled from Europe and Latin American countries to the U.S. to better their financial lot and avoid burdensome taxes back home than for any other reason, including religious or political freedom. Flight is a natural response to governments that mismanage internal affairs.

 People vote with their feet when they wish to improve their life. People move their families and hard-earned assets to new horizons to avoid oppressive government. Money and people move to where they are treated best. Avoiding oppressive taxation and mismanaged government is a motivating force for people to pack up and leave.

 It’s only natural that as more Americans become aware of the increasing number of restrictions on their freedom of movement, and prohibitions on their personal property, more and more will take action to move before things get worse. And that’s why an increasing number of smart individuals learn about offshore living and investing while there is still time.

 By official count, this past year over 250,000 Americans left the U.S. to other horizons, for many different reasons.

 As more people head for the exits, it becomes increasingly crowded and more restrictive. And as more people leave, the more oppressive a government becomes with restricting the free movement of people and property. And the protectionism spiral only worsens as economic problems choke the system.

 Instead of more restrictive regulations, Congress needs to fix the American system, and fix it fast. An increasing number of Americans are looking for the American Dream offshore. For some, they believe it is already too late.

 Will the last one leaving please turn out the lights?

 Until next time.

  David Tanzer

 David A Tanzer, Esq.
JD, BSc, Ph.D (Hon)

 For more information visit www.DavidTanzer.com or email to Datlegal@aol.com. David is the author of “How to Legally Protect Your Assets” and “Offshore Living and Investing.”

David A Tanzer & Assoc., PC.
Datlegal@aol.com
DAT@DavidTanzer.com
www.DavidTanzer.com

Vail, CO USA:
Tel. (970) 476-6100
Fax (720) 293-2272

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Tel. (64) 9 353-1328
Fax (64) 9 353-1328

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Fax (61) 7 3319 6999

(Licensed to Practice Law in U.S. States & Federal Courts;
Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; &

Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

(C) Copyright 2008 David Tanzer all rights reserved.

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

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The following was my reply to an Oct 27, 2007 question

Hi David, (ingram)
 
I am distressed by reading your comments regarding my possible future obligations to the IRS as a dual citizen.  I was born in BC to US parents, grew up in the States from age 4 to 33 and have been living back in BC for the past 19 years.  I have a small IRA (12,000 USD) in the US, which I opened 20 years ago and have not added to since.  I have no other US assets, nor have I earned income there for 20 years. I have intermittently filed US income tax returns over the years - never owed them anything due to foreign tax credit.  I have not filed for the past two years because I changed accountants, I moved within BC and the new guy doesn't file US returns.  I have however, completed W8 forms with various investment firms. I don't have a US passport nor do I receive any benefits from the US. I never intend to reside in the US or seek employment there.   I have not voted since I left. However, my net worth is beginning to grow as is my income (earned and investment) and I do not want Uncle Sam to view me as an opportunity to pay for the many unfunded liabilities they have promised the aging babyboomers (I am one of those boomers) 
 
I am wondering whether I should relinquish my US citizenship and whether I can consult with you or would you recommend someone else to discuss my situation in detail? What fees might I expect?  I am in the Vancouver area. I want to know what potential ramifications there might be from a legal and tax perspective of relinquishing.  I imagine I would first collapse my IRA - pay the tax and then attend the US Consulate, complete a questionnaire, and take an oath, etc. but I wonder about any potentially negative implications?  Do I need to file the last 2 years taxes and next year's if I collapse my IRA?
 
I obtained US citizenship for my 10 and 12 year old daughters who were born in Canada by registering them for the US citizens born abroad program - so now they have dual citizenship. What do I do for them as I don't want them to be obliged to have to declare their world income to the IRS into perpetuity?
Would you please provide us a quote for back filing my US tax returns for the last 2 years, I have a copy of my CAD returns and don't owe $ to the IRS? I am a xxxxxxxxxxxxxxx employed by xxxxxxxxxx,
 
I own 3 rental properties in the Lower Mainland and had some stock investments (jointly with my wife) - all of our income has been earned in Canada and I have no ties to the US (except the IRA mentioned above). We are also wondering what it might cost to have you be our accountant to file our CAD and US taxes for 2007 and discuss relinquishing the US citizenship?
 
Regards,
-----------------------------------------------------------------------------------------
 
david ingram replies:
 
Do NOT expect replies as fast as this in the future. It was sent to an address that I do NOT answer questions from as well. I have over 700 unanswered email questions that arrived before yours.
 
However, this arrived as i was cleaning up my files so here goes.
 
Giving up your US citizenship to avoid income tax filing results in your being banned from the US in perpetuity.  It is usually not a good idea and fewer than 50 people a year actually go through the process because of the ramifications.
 
In addition, you trigger a 'departure' tax when you do and the rules are that you are supposed to keep on filing US returns for 10 more years.
 
What you are talking about is filing two returns.  More work, and more cost but rarely more tax. people in 43 states and the Province of Quebec file two physical returns and it does not kill them.
 
You should likely come and see me for a $400.00 hour.
 
In general, for a current year, we charge $800 to $2,800 for a US / Canadian return.  If you have three rentals and capital gains, you are likely in the $1,500 range.
 
Doing the two old ones at this time of year would likely be under $1,000 unless you have multi stock trades, etc.
 
and you must do them.  Not filing form TDF 90-22.1 is now a stated minimum $10,000 penalty.  Not filing form 8891 for your RRSP is a fine of 35% of the principal plus 5% for every year not reported.
 
And, cheer up.  In another 9 years, you qualify for US social Security.




SUGGESTED PRICE GUIDELINES - May 17, 2008

david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.
 





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