Proposed American legislation on billionaires could have a major impact on the “exit tax” of expatriates.

Legislation recently introduced in the U.S. Congress to curtail billionaires’ tax loopholes could also effectively increase the “exit tax” on wealthy who want to expatriate.

U.S. Senate Finance Committee Chairman Ron Wyden of Oregon has joined 15 other Democratic senators in introducing the Billionaires Income Tax Act, a bill designed to close tax loopholes for the ultra-wealthy. The Act would curtail billionaires’ legal tactic of “buy, borrow, die,” in which the uber-wealthy buy assets that appreciate; borrow against that asset’s growing, untaxed value; then pass on the assets to heirs, often tax-free.

The proposal would apply to taxpayers with more than $1 billion in assets or more than $100 million in income for three consecutive years. According to the bill’s fact sheet, that’s roughly just 700 U.S. taxpayers.

Tradable assets, such as stocks that can be valued annually, owned by billionaires will be marked to market each year. Billionaires would pay tax on the gains or take deductions for losses whether or not they sell the asset.

When a billionaire sells a non-tradable asset such as real estate or a business interest, he or she would pay their usual tax plus a “deferral recapture amount,” which is akin to interest on tax deferred while the individual held that asset.

The amount owed is calculated by allocating an equal amount of gain to each year the billionaire held that specific asset, determining how much tax would have been owed on the gain in each year and assessing interest on unpaid tax for the time the tax was deferred.

The first time that billionaires’ tradable assets are marked-to-market, they may elect to pay the resulting tax over five years or elect to treat up to $1 billion of tradable stock in a single corporation as a non-tradable asset, which will help to ensure that the proposal does not affect the ability of an individual who founds a successful company to maintain their controlling interest.

Expat issue

Certain expats would face a big problem under this proposal: Covered expatriates will still have to mark all of their assets to market upon expatriation but will not be allowed a deferral election.

An American citizen or green card holder is a “covered expatriate,” according to the IRS, if:

• His or her average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than $171,000 (2020);

• His or her net worth is $2 million or more on the date of their expatriation or termination of residency; or

• He or she fails to certify on IRS Form 8854 that they have complied with all U.S. federal tax obligations for the five years preceding the date of their expatriation or termination of residency. (This includes FinCEN Form 114, “Report of Foreign Bank and Financial Accounts,” or “FBAR,” and experts say this requirement frequently trips up those who expatriate.)

More than 80 pages into the Billionaires Income Tax Act, the bill says that covered expatriates will be required to mark all of their assets to market upon expatriation but will not be allowed a deferral election under U.S. Code section 877A, which defers tax until the asset is disposed.

Sec. 877 also mandates a covered expatriate will incur U.S. income tax on worldwide income for any year when he or she spends more than 30 days in the U.S. during the 10 years following expatriation, The bill proposes that all a covered expatriate’s worldwide assets be marked to market again at the end of the 10-year period.

The current highest tax rate is 37%. That’s expected to increase to 39.5% when the Tax Cuts and Jobs Act sunsets at the end of 2025.

Questions

Experts say that this bill brings up questions. For example, the Tax Foundation asks that publicly traded stock may seem easy to value, but what about large blocks, which might be impractical to sell? How would the IRS settle disputes over valuations?

Regarding international taxpayers, is it better to leave the U.S. now and pay the current 23.8% exit tax rate? Can using a tie-breaker clause in a tax treaty cause expatriation?

And how might the landmark Moore case now before the U.S. Supreme Court change the taxation of all realized and unrealized income?

Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.

 

 

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.

 

Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

 

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.

 

Alicea is fluent in Spanish and has a working knowledge of Portuguese.

 

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

 

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

 

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.