Potential Issues Regarding the Heroes Earnings Assistance and Relief Tax for US Expats
James McCann writing for Bloomberg Law has recently covered 10 potential surprises that U.S. expatriates might encounter concerning the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008.
Whilst these warnings are aimed at citizens ceasing to be U.S. citizens or long-term green cardholders. They continue to show the added burden that all U.S. expats face these days regarding their taxes.
The article covers ten points to try and bring light to these often complex issues.
1. What’s the worst that can happen?
An expatriate might be taxed on illiquid assets, not owned, or taxed on deferred compensation not eligible to be paid.
Foregoing taxes may be owed to the U.S. and owe taxes for the same assets or income to another country when foreign tax credits will often not be available.
Gifts made by expatriates may incur increased transfer taxes or maybe taxed twice due to foot-fault compliance violations.
2. Are you a covered expatriate?
Whether you are a covered expatriate or not can be hard to define and may be based on assets that are hard to value or be based on the nuances of gift tax rules; whether you are or not may result in very different planning and advice before and after expatriation.
3. Past compliance failures (no matter how small) are neither forgotten nor forgiven
Given the proliferation of reporting requirements for U.S. taxpayers living abroad. Making sure that everything is reported on time and correctly is very important. Compliance failures could cause one to become a covered expatriate even when net worth limits are not reached.
4. High income does not necessarily mean that you are ‘covered currently.
You will be a covered expatriate if your average income tax liability for the preceding five taxable years exceeds $155,000. Suppose you live in a high-tax jurisdiction. You may fall below income tax thresholds due to foreign tax credits.
5. Planning through pre-expatriation gifts
Though gifts may permit expatriates to stay below the net worth threshold of $2 million, you should be prepared to defend pre-expatriation gifts that are classed as ‘significant changes in your assets and liability’ for the preceding 5 years. This is done whether you’re a covered expatriate or not.
6. Estate planning may become even more complicated
U.S. inheritance taxes may rear their head if your heirs and beneficiaries are U.S. persons. With the gift and estate taxes being exchanged for inheritance taxes at the highest applicable gift or estate rates.
7. Could you be taxed twice?
As expatriates are taxed on a mark-to-market basis, relief from double taxation treaties may not be possible, especially if the U.S. and the current country of residence impose taxes on the same profit but in different years.
8. Do you own a home?
As it’s not clear whether the tax relief on the sale of your primary residence applies to gains realized due to the application of mark-to-market taxes, a covered expatriate should sell their home before expatriating.
9. Does someone owe you money?
Covered expatriation and deferred compensation rules are very complex and may be taxed at expatriation and/or when paid.
10. Does expatriate end your U.S. tax obligations?
It may or may not, though an expatriate with no connection to the U.S. after expatriation, should have no subsequent U.S. tax obligations. The act of expatriating does create numerous tax obligations.