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Important Changes to US Tax Law Will Affect Expats

Important Changes to US Tax Law Will Affect Expats (Must Read)
Monday, June 16 2008 at 09:45 AM EST
Contributed by: Don Winner
Views: 59

By DON WINNER for Panama-Guide.com - The US government is about to apply new taxes to expatriates around the globe. Congress has passed a new law that provides relief to US servicemen, and in order to pay for those compensations they are going to raise some taxes and create other new taxes. The US House and Senate have passed H.R. 6081: Heroes Earnings Assistance and Relief Tax Act of 2008. The bill was introduced by Rep. Charles Rangel [D-NY] and 26 cosponsors (all Democrats) on 16 May 2008, passed the House on 20 May 2008 and the the US Senate on 22 May 2008. "Having passed in identical form in both the House and Senate, this bill now awaits the signature of the President before becoming law." The bill was presented to the President on 6 June 2008. (more)
Bend Over, Here It Comes Again: I don't know exactly how bad this is going to be, and I don't know if I'm right, but it looks like there are several ways in which this new law will completely screw over expatriates. There is no doubt, if you voluntarily renounce your US citizenship, then they are going to take a piece of whatever you have before you go. But there are also increases in taxes on anyone designated as an "expatriate" and a greatly increased definition of that status. This law modifies the base law regarding the Internal Revenue Code, specifically with regards to "what is an expatriate." It defines anyone who voluntarily relinquishes their US citizenship, as well as "any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6))." Of course, now you want to know what that section of the IRS law says.
• 7701(b)(6) Lawful permanent resident.--For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if--
• 7701(b)(6)(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
• 7701(b)(6)(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
Another Important Change to Tax Law: This law adds an important paragraph to the IRS tax law with regards to defining the term "expatriate" and how you will be treated under this law. Specifically:
• (B) Paragraph (6) of section 7701(b) is amended by adding at the end the following flush sentence:
• An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.'.
Pensionado = Screwed? For example, I have permission from the government of Panama to live here permanently as a resident. So, under the provisions of the paragraph above, I am an individual who has "commenced to be treated as a resident of a foreign country." This paragraph has to do with provisions of tax treaties between the United States and foreign countries, and I don't know if there is a tax treaty between the United States and Panama. I just want to know if I'm going to get screwed. I would imagine that everyone with a pensionado visa, basically permission to reside permanently in Panama, would fall under the same status.
The 30 Day Rule: I know that when filing income taxes you can claim expatriate status if you pass the physical residency test - in other words if you spend less than 30 calendar days (total) in the United States during a year, then you are basically exempt from US taxes (or the first $84,000 of earnings). I know, that number has changed, but the last time I looked it was like $84,000 so if you know the right number send it to me. In any case, maybe they will start applying the same 30-day rule to classify you as an "expatriate" in order to hammer you with new taxes. Like I said, I don't know yet.
Full Text of Law: Want to get it from the horse's mouth? Here is a link to the full text of this bill.
Here's The Short Version: This, from GovTrack:
 H.R. 6081—Heroes Earnings Assistance and Relief Tax Act of 2008
 (Rangel, D-NY)
 Order of Business: The bill is scheduled to be considered on Tuesday, May 20, 2008, under a motion to suspend the rules and pass the bill.
 Summary: The original version of the Heroes Earnings Assistance and Relief Tax Act (H.R. 3997) was passed in the House on November 6, 2007, by a recorded vote of 410—0. The version on the floor under a suspension today includes modifications made since the passage of H.R. 3997. H.R. 6081 would modify tax provisions to grant tax benefits to veterans, active duty servicemen, and certain volunteers. The original House bill would have reduced revenue by $643 million over the FY 2008 – FY 2012 period and $2.07 billion over the FY 2008 – FY 2017 period. In order to pay for these reductions in revenue, the bill would have increased penalties on individuals and business for failure to file accurate and timely tax returns. This pay-for would have increased revenue by $911 million over the FY 2008 – FY 2012 period and $2.19 billion over the FY 2008 – FY 2017 period. The Joint Committee on Taxation (JCT) did not file a report for H.R. 6081.
 The Senate-passed version of H.R. 3997 would have changed the overall cost of the bill by adding more benefits to members of the armed services and increasing a tax penalty on expatriates. The following is a description of a new version of the bill that the House will consider today on the flood.
 Note: The following Joint Committee on Taxation (JCT) estimates are based on estimates of similar provisions contained in H.R. 3997.
 Benefits for Military and Volunteer Firefighters
 Stimulus Payment Provision - Under current law, taxpayers who have Individual Taxpayer Identification Numbers (ITINs) rather than Social Security numbers are not eligible to receive economic stimulus checks. If couples file jointly and one has and ITIN and one has a Social Security number, neither may receive a stimulus payout. H.R. 6081 would allow active duty service members to receive a check even if there spouse did not have a Social Security number.
 Combat Pay for the Purposes of Earned Income Tax Credit - Permanently extends the allowance of “combat pay�? as earned income for the purposes of determining the earned income tax credit. According to the Joint Committee on Taxation (JCT), this provision will reduce revenue by $47 million over the FY 2008 – FY 2013 period and $83 million over the FY 2008 – FY 2017 period.
 Modification of Mortgage Revenue Bonds for Veterans - Permanently extends a provision that allows mortgage bonds to be issued to veterans regardless of the first-time homebuyer requirement (without this waiver, current law restricts using bonds to finance mortgages if the buyer had an ownership interest within the past three years). According to the JCT, this provision will reduce revenue by $171 million over the FY 2008 – FY 2013 period and $826 million over the FY 2008 – FY 2017 period.
 Increases the annual limit on qualified veterans’ mortgage bonds that can be issued in Alaska, Oregon, and Wisconsin from $25 million to $100 million. According to the JCT, this provision will reduce revenue by $69 million over the FY 2008 – FY 2013 period and $297 million over the FY 2008 – FY 2017 period.
 Survivor and Disability Payments with Respect to Qualified Military Service - Requires retirement plans from civilian jobs to treat the day prior to the date of a service member’s death as the date which they had resumed employment and been terminated. This section allows deceased service members and their families to receive benefits that are contingent on termination of employment as a result of death to trigger benefits. According to the JCT, this provision will reduce revenue by $1 million over the FY 2008 – FY 2013 period and $2 million over the FY 2008 – FY 2017 period.
 Treatment of Differential Military Pay as Wages - Amends federal tax withholding laws to treat differential pay (pay that is voluntarily paid by an employer to an employee while they serve in the armed forces) as wage compensation and permit wage withholdings from differential payments for retirement plans. According to the JCT, this provision will reduce revenue by $4 million over the FY 2008 – FY 2013 period and $8 million over the FY 2008 – FY 2017 period.
 Exclusion from Income for Volunteer Firefighters and Medical Responders - Excludes reductions or rebates of taxes by state and local governments, given to volunteer firefighters or emergency medical responders in exchange for their services, as taxable income through December 31, 2015. According to the JCT, this provision will reduce revenue by $122 million over the FY 2008 – FY 2012 period and $565 million over the FY 2008 – FY 2017 period.
 Special Time Limitation to File Claims for Refunds Relating to Disability Determinations - Extends the period of time that military personnel who receive disability determinations from the VA may file claims for credits or refunds. Currently, a taxpayer must file claims for credit or refund within three years of filing the refund or two years of paying the tax. This section extends that time for individuals who receive disability determinations until one year after the date of the determination. According to the JCT, this provision will reduce revenue by $5 million over the FY 2008 – FY 2013 period and $10 million over the FY 2008 – FY 2017 period.
 Penalty Free Retirement Plan Withdrawals for Active Duty Reservists - Permanently extends a provision that allows active duty reservists to make penalty free withdrawals from their retirement plans. According to the JCT, this provision will increase revenue by $1 million over the FY 2008 – FY 2013 period and reduce revenue by $6 million over the FY 2008 – FY 2017 period.
 Permanent Extension of Disclosure Authority - Permanently extends a provision that allows the disclosure of certain tax information to the Department of Veterans’ Affairs (VA) for the purpose of determining eligibility for its pension and health-care programs. According to the JCT, this provision will increase revenue by $43 million over the FY 2008 – FY 2013 period and $164 million over the FY 2008 – FY 2017 period.
 Contributions of Military Death Gratuities - Allows recipients of military death gratuities to invest benefits from the gratuity into Roth IRAs or educational savings accounts regardless of annual contribution limits. According to the JCT, this provision will reduce revenue by $1 million over the FY 2008 – FY 2013 period and $4 million over the FY 2008 – FY 2017 period.
 Suspension of Five Year Test for Peace Corps Volunteers - Allows Peace Corps volunteers to suspend the “five-year test�? for excluding gains on the sale of a principle residence from taxes. Under current law, taxpayers may exclude up to $250,000 ($500,000 for joint filers) in gains on the sale of their principle residence if they have lived in the residence for two of the last five years (the “five-year test�?). This section would allow a Peace Corps volunteer to suspend the test requirement for up to ten years if they are absent from the residence due to their service obligations. According to the JCT, this provision will reduce revenue by $1 million over the FY 2008 – FY 2017 period.
 Improvements in Supplemental Security Income (SSI)
 Equitable Treatment of Military Families under SSI - Reclassifies military cash allowances as earned income. Under current law, most military payments other than basic pay are treated as “unearned income.�? Every dollar of unearned income after $20 reduces SSI program benefits by $1. Thus, this section would increase SSI program benefits available to families of service members. According to the JCT, this provision will reduce revenue by $11 million over the FY 2008 – FY 2013 period and $26 million over the FY 2008 – FY 2017 period.
 Removal of Penalties for Blind Veterans under SSI - Prohibits consideration of state annuity payments made to blind veterans when determining SSI benefits. Under current law, state annuity payments made to blind veterans are regarded as unearned income and reduce SSI benefits. According to the JCT, this provision will reduce revenue by $1 million over the FY 2008 – FY 2013 period and $3 million over the FY 2008 – FY 2017 period.
 Exclusion of Benefits for AmeriCorps Volunteers under SSI - Prohibits consideration of benefits or allowances made to AmeriCorps volunteers when determining SSI benefits. A JCT revenue estimate is not currently available for this section.
 Provisions that Raise Revenue
 Increase the Minimum Penalty for Failure to File - Increases the penalty for failure to file a tax return within 60 days of the due date from $100 to $250. Under current law, the penalty is the lesser of $100 or 100% of the tax owed. According to the JCT, this provision will increase revenue by $132 million over the FY 2008 – FY 2013 period and $296 million over the FY 2008 – FY 2017 period.
 Penalty for Failure to File S Corporation Returns - Creates new penalties on S corporations (corporations that are exempt from federal income tax other than tax on certain capital gains and passive income) that fail to file a timely and accurate tax return. An increased penalty of $100 per month for each shareholder would be assessed for up to 12 months and could be levied on any S corporation that fails to submit all the required information on a return. According to the JCT, this provision will increase revenue by $413 million over the FY 2008 – FY 2013 period and $964 million over the FY 2008 – FY 2017 period.
 Increase in Information Return Penalties - Increases penalties on businesses for failure to file correct information returns, such as 1099 forms, which include information regarding amounts paid to employees and interest paid to shareholders. This section increases the penalties for businesses that correct the information within 30 days from a minimum of $15 to $25 and a maximum of $75,000 to $200,000. Penalties for businesses that fail to correct the information by August 1st would increase from a minimum of $50 to $100 and a maximum of $250,000 to $600,000. The bill would also increase maximum penalties on small businesses from $25,000 to $75,000 if corrections are made within 30 days. If a small business fails to make corrections by August 1st the maximum amount is increased from $100,000 to $250,000. According to the JCT, this provision will increase revenue by $83 million over the FY 2008 – FY 2013 period and $280 million over the FY 2008 – FY 2017 period.
 Increased Penalties on Expatriates - The Senate amendment would require that, for taxation purposes, the property of any U.S. citizen who renounces their citizenship be treated like it was sold at market value the day prior to the renouncement. According to the JCT, this provision will increase revenue by $764 million over the FY 2008 – FY 2017 period.
 Committee Action: H.R. 6081 was introduced on May 16, 2008, and referred to the House Committee on Ways and Means, which took no official action.
 Administration Position: The Administration’s position is not currently available.
 Cost to Taxpayers: A CBO or JCT score for H.R. 6081 was not available at press time.
 Does the Bill Expand the Size and Scope of the Federal Government? No.
 Does the Bill Contain Any New State-Government, Local-Government, or Private-Sector Mandates? No.
 Does the Bill Comply with House Rules Regarding Earmarks/Limited Tax Benefits/Limited Tariff Benefits? A Committee Report citing compliance with rules regarding earmarks, limited tax benefits, or limited tariff benefits was not available. Such a report is not required because the bill is being considered under a suspension of the rules.
 Constitutional Authority: A Committee Report citing constitutional authority was not available.
 RSC Staff Contact: Andy Koenig; andy.koenig at mail.house.gov; 202-226-9717.
Renounced Your US Citizenship Lately? Maybe you just did. Check out the full text of this law, particularly the section pertaining to expatriates:
 TITLE III--REVENUE PROVISIONS
 SEC. 301. REVISION OF TAX RULES ON EXPATRIATION.
 (a) In General- Subpart A of part II of subchapter N of chapter 1 is amended by inserting after section 877 the following new section:
 SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
 (a) General Rules- For purposes of this subtitle--
 (1) MARK TO MARKET- All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.
 (2) RECOGNITION OF GAIN OR LOSS- In the case of any sale under paragraph (1)--
 (A) notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and
 (B) any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss. Proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account under the preceding sentence, determined without regard to paragraph (3).
 (3) EXCLUSION FOR CERTAIN GAIN-
 (A) IN GENERAL- The amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero) by $600,000.
 (B) ADJUSTMENT FOR INFLATION-
 (i) IN GENERAL- In the case of any taxable year beginning in a calendar year after 2008, the dollar amount in subparagraph (A) shall be increased by an amount equal to--
 (I) such dollar amount, multiplied by
 (II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting `calendar year 2007' for `calendar year 1992' in subparagraph (B) thereof.
 (ii) ROUNDING- If any amount as adjusted under clause (i) is not a multiple of $1,000, such amount shall be rounded to the nearest multiple of $1,000.
 (b) Election To Defer Tax-
 (1) IN GENERAL- If the taxpayer elects the application of this subsection with respect to any property treated as sold by reason of subsection (a), the time for payment of the additional tax attributable to such property shall be extended until the due date of the return for the taxable year in which such property is disposed of (or, in the case of property disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as the Secretary may prescribe).
 (2) DETERMINATION OF TAX WITH RESPECT TO PROPERTY- For purposes of paragraph (1), the additional tax attributable to any property is an amount which bears the same ratio to the additional tax imposed by this chapter for the taxable year solely by reason of subsection (a) as the gain taken into account under subsection (a) with respect to such property bears to the total gain taken into account under subsection (a) with respect to all property to which subsection (a) applies.
 (3) TERMINATION OF EXTENSION- The due date for payment of tax may not be extended under this subsection later than the due date for the return of tax imposed by this chapter for the taxable year which includes the date of death of the expatriate (or, if earlier, the time that the security provided with respect to the property fails to meet the requirements of paragraph (4), unless the taxpayer corrects such failure within the time specified by the Secretary).
 (4) SECURITY-
 (A) IN GENERAL- No election may be made under paragraph (1) with respect to any property unless adequate security is provided with respect to such property.
 (B) ADEQUATE SECURITY- For purposes of subparagraph (A), security with respect to any property shall be treated as adequate security if--
 (i) it is a bond which is furnished to, and accepted by, the Secretary, which is conditioned on the payment of tax (and interest thereon), and which meets the requirements of section 6325, or
 (ii) it is another form of security for such payment (including letters of credit) that meets such requirements as the Secretary may prescribe.
 (5) WAIVER OF CERTAIN RIGHTS- No election may be made under paragraph (1) unless the taxpayer makes an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of any tax imposed by reason of this section.
 (6) ELECTIONS- An election under paragraph (1) shall only apply to property described in the election and, once made, is irrevocable.
 (7) INTEREST- For purposes of section 6601, the last date for the payment of tax shall be determined without regard to the election under this subsection.
 (c) Exception for Certain Property- Subsection (a) shall not apply to--
 (1) any deferred compensation item (as defined in subsection (d)(4)),
 (2) any specified tax deferred account (as defined in subsection (e)(2)), and
 (3) any interest in a nongrantor trust (as defined in subsection (f)(3)).
 (d) Treatment of Deferred Compensation Items-
 (1) WITHHOLDING ON ELIGIBLE DEFERRED COMPENSATION ITEMS-
 (A) IN GENERAL- In the case of any eligible deferred compensation item, the payor shall deduct and withhold from any taxable payment to a covered expatriate with respect to such item a tax equal to 30 percent thereof.
 (B) TAXABLE PAYMENT- For purposes of subparagraph (A), the term `taxable payment' means with respect to a covered expatriate any payment to the extent it would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States. A deferred compensation item shall be taken into account as a payment under the preceding sentence when such item would be so includible.
 (2) OTHER DEFERRED COMPENSATION ITEMS- In the case of any deferred compensation item which is not an eligible deferred compensation item--
 (A)(i) with respect to any deferred compensation item to which clause (ii) does not apply, an amount equal to the present value of the covered expatriate's accrued benefit shall be treated as having been received by such individual on the day before the expatriation date as a distribution under the plan, and
 (ii) with respect to any deferred compensation item referred to in paragraph (4)(D), the rights of the covered expatriate to such item shall be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date,
 (B) no early distribution tax shall apply by reason of such treatment, and
 (C) appropriate adjustments shall be made to subsequent distributions from the plan to reflect such treatment.
 (3) ELIGIBLE DEFERRED COMPENSATION ITEMS- For purposes of this subsection, the term `eligible deferred compensation item' means any deferred compensation item with respect to which--
 (A) the payor of such item is--
 (i) a United States person, or
 (ii) a person who is not a United States person but who elects to be treated as a United States person for purposes of paragraph (1) and meets such requirements as the Secretary may provide to ensure that the payor will meet the requirements of paragraph (1), and
 (B) the covered expatriate--
 (i) notifies the payor of his status as a covered expatriate, and
 (ii) makes an irrevocable waiver of any right to claim any reduction under any treaty with the United States in withholding on such item.
 (4) DEFERRED COMPENSATION ITEM- For purposes of this subsection, the term `deferred compensation item' means--
 (A) any interest in a plan or arrangement described in section 219(g)(5),
 (B) any interest in a foreign pension plan or similar retirement arrangement or program,
 (C) any item of deferred compensation, and
 (D) any property, or right to property, which the individual is entitled to receive in connection with the performance of services to the extent not previously taken into account under section 83 or in accordance with section 83.
 (5) EXCEPTION- Paragraphs (1) and (2) shall not apply to any deferred compensation item to the extent attributable to services performed outside the United States while the covered expatriate was not a citizen or resident of the United States.
 (6) SPECIAL RULES-
 (A) APPLICATION OF WITHHOLDING RULES- Rules similar to the rules of subchapter B of chapter 3 shall apply for purposes of this subsection.
 (B) APPLICATION OF TAX- Any item subject to the withholding tax imposed under paragraph (1) shall be subject to tax under section 871.
 (C) COORDINATION WITH OTHER WITHHOLDING REQUIREMENTS- Any item subject to withholding under paragraph (1) shall not be subject to withholding under section 1441 or chapter 24.
 (e) Treatment of Specified Tax Deferred Accounts-
 (1) ACCOUNT TREATED AS DISTRIBUTED- In the case of any interest in a specified tax deferred account held by a covered expatriate on the day before the expatriation date--
 (A) the covered expatriate shall be treated as receiving a distribution of his entire interest in such account on the day before the expatriation date,
 (B) no early distribution tax shall apply by reason of such treatment, and
 (C) appropriate adjustments shall be made to subsequent distributions from the account to reflect such treatment.
 (2) SPECIFIED TAX DEFERRED ACCOUNT- For purposes of paragraph (1), the term `specified tax deferred account' means an individual retirement plan (as defined in section 7701(a)(37)) other than any arrangement described in subsection (k) or (p) of section 408, a qualified tuition program (as defined in section 529), a Coverdell education savings account (as defined in section 530), a health savings account (as defined in section 223), and an Archer MSA (as defined in section 220).
 (f) Special Rules for Nongrantor Trusts-
 (1) IN GENERAL- In the case of a distribution (directly or indirectly) of any property from a nongrantor trust to a covered expatriate--
 (A) the trustee shall deduct and withhold from such distribution an amount equal to 30 percent of the taxable portion of the distribution, and
 (B) if the fair market value of such property exceeds its adjusted basis in the hands of the trust, gain shall be recognized to the trust as if such property were sold to the expatriate at its fair market value.
 (2) TAXABLE PORTION- For purposes of this subsection, the term `taxable portion' means, with respect to any distribution, that portion of the distribution which would be includible in the gross income of the covered expatriate if such expatriate continued to be subject to tax as a citizen or resident of the United States.
 (3) NONGRANTOR TRUST- For purposes of this subsection, the term `nongrantor trust' means the portion of any trust that the individual is not considered the owner of under subpart E of part I of subchapter J. The determination under the preceding sentence shall be made immediately before the expatriation date.
 (4) SPECIAL RULES RELATING TO WITHHOLDING- For purposes of this subsection--
 (A) rules similar to the rules of subsection (d)(6) shall apply, and
 (B) the covered expatriate shall be treated as having waived any right to claim any reduction under any treaty with the United States in withholding on any distribution to which paragraph (1)(A) applies unless the covered expatriate agrees to such other treatment as the Secretary determines appropriate.
 (5) APPLICATION- This subsection shall apply to a nongrantor trust only if the covered expatriate was a beneficiary of the trust on the day before the expatriation date.
 (g) Definitions and Special Rules Relating to Expatriation- For purposes of this section--
 (1) COVERED EXPATRIATE-
 (A) IN GENERAL- The term `covered expatriate' means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).
 (B) EXCEPTIONS- An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if--
 (i) the individual--
 (I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
 (II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or
 (ii)(I) the individual's relinquishment of United States citizenship occurs before such individual attains age 18 1/2 , and
 (II) the individual has been a resident of the United States (as so defined) for not more than 10 taxable years before the date of relinquishment.
 (C) COVERED EXPATRIATES ALSO SUBJECT TO TAX AS CITIZENS OR RESIDENTS- In the case of any covered expatriate who is subject to tax as a citizen or resident of the United States for any period beginning after the expatriation date, such individual shall not be treated as a covered expatriate during such period for purposes of subsections (d)(1) and (f) and section 2801.
 (2) EXPATRIATE- The term `expatriate' means--
 (A) any United States citizen who relinquishes his citizenship, and
 (B) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
 (3) EXPATRIATION DATE- The term `expatriation date' means--
 (A) the date an individual relinquishes United States citizenship, or
 (B) in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
 (4) RELINQUISHMENT OF CITIZENSHIP- A citizen shall be treated as relinquishing his United States citizenship on the earliest of--
 (A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
 (B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)),
 (C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
 (D) the date a court of the United States cancels a naturalized citizen's certificate of naturalization.
 Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.
 (5) LONG-TERM RESIDENT- The term `long-term resident' has the meaning given to such term by section 877(e)(2).
 (6) EARLY DISTRIBUTION TAX- The term `early distribution tax' means any increase in tax imposed under section 72(t), 220(e)(4), 223(f)(4), 409A(a)(1)(B), 529(c)(6), or 530(d)(4).
 (h) Other Rules-
 (1) TERMINATION OF DEFERRALS, ETC- In the case of any covered expatriate, notwithstanding any other provision of this title--
 (A) any time period for acquiring property which would result in the reduction in the amount of gain recognized with respect to property disposed of by the taxpayer shall terminate on the day before the expatriation date, and
 (B) any extension of time for payment of tax shall cease to apply on the day before the expatriation date and the unpaid portion of such tax shall be due and payable at the time and in the manner prescribed by the Secretary.
 (2) STEP-UP IN BASIS- Solely for purposes of determining any tax imposed by reason of subsection (a), property which was held by an individual on the date the individual first became a resident of the United States (within the meaning of section 7701(b)) shall be treated as having a basis on such date of not less than the fair market value of such property on such date. The preceding sentence shall not apply if the individual elects not to have such sentence apply. Such an election, once made, shall be irrevocable.
 (3) COORDINATION WITH SECTION 684- If the expatriation of any individual would result in the recognition of gain under section 684, this section shall be applied after the application of section 684.
 (i) Regulations- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.'.
 (b) Tax on Gifts and Bequests Received by United States Citizens and Residents From Expatriates-
 (1) IN GENERAL- Subtitle B (relating to estate and gift taxes) is amended by inserting after chapter 14 the following new chapter:
 CHAPTER 15--GIFTS AND BEQUESTS FROM EXPATRIATES
 Sec. 2801. Imposition of tax.
 SEC. 2801. IMPOSITION OF TAX.
 (a) In General- If, during any calendar year, any United States citizen or resident receives any covered gift or bequest, there is hereby imposed a tax equal to the product of--
 (1) the highest rate of tax specified in the table contained in section 2001(c) as in effect on the date of such receipt (or, if greater, the highest rate of tax specified in the table applicable under section 2502(a) as in effect on the date), and
 (2) the value of such covered gift or bequest.
 (b) Tax To Be Paid by Recipient- The tax imposed by subsection (a) on any covered gift or bequest shall be paid by the person receiving such gift or bequest.
 (c) Exception for Certain Gifts- Subsection (a) shall apply only to the extent that the value of covered gifts and bequests received by any person during the calendar year exceeds the dollar amount in effect under section 2503(b) for such calendar year.
 (d) Tax Reduced by Foreign Gift or Estate Tax- The tax imposed by subsection (a) on any covered gift or bequest shall be reduced by the amount of any gift or estate tax paid to a foreign country with respect to such covered gift or bequest.
 (e) Covered Gift or Bequest-
 (1) IN GENERAL- For purposes of this chapter, the term `covered gift or bequest' means--
 (A) any property acquired by gift directly or indirectly from an individual who, at the time of such acquisition, is a covered expatriate, and
 (B) any property acquired directly or indirectly by reason of the death of an individual who, immediately before such death, was a covered expatriate.
 (2) EXCEPTIONS FOR TRANSFERS OTHERWISE SUBJECT TO ESTATE OR GIFT TAX- Such term shall not include--
 (A) any property shown on a timely filed return of tax imposed by chapter 12 which is a taxable gift by the covered expatriate, and
 (B) any property included in the gross estate of the covered expatriate for purposes of chapter 11 and shown on a timely filed return of tax imposed by chapter 11 of the estate of the covered expatriate.
 (3) EXCEPTIONS FOR TRANSFERS TO SPOUSE OR CHARITY- Such term shall not include any property with respect to which a deduction would be allowed under section 2055, 2056, 2522, or 2523, whichever is appropriate, if the decedent or donor were a United States person.
 (4) TRANSFERS IN TRUST-
 (A) DOMESTIC TRUSTS- In the case of a covered gift or bequest made to a domestic trust--
 (i) subsection (a) shall apply in the same manner as if such trust were a United States citizen, and
 (ii) the tax imposed by subsection (a) on such gift or bequest shall be paid by such trust.
 (B) FOREIGN TRUSTS-
 (i) IN GENERAL- In the case of a covered gift or bequest made to a foreign trust, subsection (a) shall apply to any distribution attributable to such gift or bequest from such trust (whether from income or corpus) to a United States citizen or resident in the same manner as if such distribution were a covered gift or bequest.
 (ii) DEDUCTION FOR TAX PAID BY RECIPIENT- There shall be allowed as a deduction under section 164 the amount of tax imposed by this section which is paid or accrued by a United States citizen or resident by reason of a distribution from a foreign trust, but only to the extent such tax is imposed on the portion of such distribution which is included in the gross income of such citizen or resident.
 (iii) ELECTION TO BE TREATED AS DOMESTIC TRUST- Solely for purposes of this section, a foreign trust may elect to be treated as a domestic trust. Such an election may be revoked with the consent of the Secretary.
 (f) Covered Expatriate- For purposes of this section, the term `covered expatriate' has the meaning given to such term by section 877A(g)(1).'.
 (2) CLERICAL AMENDMENT- The table of chapters for subtitle B is amended by inserting after the item relating to chapter 14 the following new item:
 Chapter 15. Gifts and Bequests From Expatriates.'.
 (c) Definition of Termination of United States Citizenship-
 (1) IN GENERAL- Section 7701(a) is amended by adding at the end the following new paragraph:
 (50) TERMINATION OF UNITED STATES CITIZENSHIP-
 (A) IN GENERAL- An individual shall not cease to be treated as a United States citizen before the date on which the individual's citizenship is treated as relinquished under section 877A(g)(4).
 (B) DUAL CITIZENS- Under regulations prescribed by the Secretary, subparagraph (A) shall not apply to an individual who became at birth a citizen of the United States and a citizen of another country.'.
 (2) CONFORMING AMENDMENTS-
 (A) Paragraph (1) of section 877(e) is amended to read as follows:
 (1) IN GENERAL- Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.'.
 (B) Paragraph (6) of section 7701(b) is amended by adding at the end the following flush sentence:
 An individual shall cease to be treated as a lawful permanent resident of the United States if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of such treaty applicable to residents of the foreign country, and notifies the Secretary of the commencement of such treatment.'.
 (C) Section 7701 is amended by striking subsection (n) and by redesignating subsections (o) and (p) as subsections (n) and (o), respectively.
 (d) Termination of Section 877- Section 877 is amended by adding at the end the following new subsection:
 (h) Termination- This section shall not apply to any individual whose expatriation date (as defined in section 877A(g)(3)) is on or after the date of the enactment of this subsection.'.
 (e) Information Returns- Section 6039G is amended--
 (1) by inserting `or 877A' after `section 877(b)' in subsection (a), and
 (2) by inserting `or 877A' after `section 877(a)' in subsection (d).
 (f) Clerical Amendment- The table of sections for subpart A of part II of subchapter N of chapter 1 is amended by inserting after the item relating to section 877 the following new item:
 `Sec. 877A. Tax responsibilities of expatriation.'.
 (g) Effective Date-
 (1) IN GENERAL- Except as provided in this subsection, the amendments made by this section shall apply to any individual whose expatriation date (as so defined) is on or after the date of the enactment of this Act.
 (2) GIFTS AND BEQUESTS- Chapter 15 of the Internal Revenue Code of 1986 (as added by subsection (b)) shall apply to covered gifts and bequests (as defined in section 2801 of such Code, as so added) received on or after the date of the enactment of this Act from transferors (or from the estates of transferors) whose expatriation date is on or after such date of enactment.
 SEC. 302. CERTAIN DOMESTICALLY CONTROLLED FOREIGN PERSONS PERFORMING SERVICES UNDER CONTRACT WITH UNITED STATES GOVERNMENT TREATED AS AMERICAN EMPLOYERS.
 (a) FICA Taxes- Section 3121 (relating to definitions) is amended by adding at the end the following new subsection:
 (z) Treatment of Certain Foreign Persons as American Employers-
 (1) IN GENERAL- If any employee of a foreign person is performing services in connection with a contract between the United States Government (or any instrumentality thereof) and any member of any domestically controlled group of entities which includes such foreign person, such foreign person shall be treated for purposes of this chapter as an American employer with respect to such services performed by such employee.
 (2) DOMESTICALLY CONTROLLED GROUP OF ENTITIES- For purposes of this subsection--
 (A) IN GENERAL- The term `domestically controlled group of entities' means a controlled group of entities the common parent of which is a domestic corporation.
 (B) CONTROLLED GROUP OF ENTITIES- The term `controlled group of entities' means a controlled group of corporations as defined in section 1563(a)(1), except that--
 (i) `more than 50 percent' shall be substituted for `at least 80 percent' each place it appears therein, and
 (ii) the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563.
 A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3)) by members of such group (including any entity treated as a member of such group by reason of this sentence).
 (3) LIABILITY OF COMMON PARENT- In the case of a foreign person who is a member of any domestically controlled group of entities, the common parent of such group shall be jointly and severally liable for any tax under this chapter for which such foreign person is liable by reason of this subsection, and for any penalty imposed on such person by this title with respect to any failure to pay such tax or to file any return or statement with respect to such tax or wages subject to such tax. No deduction shall be allowed under this title for any liability imposed by the preceding sentence.
 (4) PROVISIONS PREVENTING DOUBLE TAXATION-
 (A) AGREEMENTS- Paragraph (1) shall not apply to any services which are covered by an agreement under subsection (l).
 (B) EQUIVALENT FOREIGN TAXATION- Paragraph (1) shall not apply to any services if the employer establishes to the satisfaction of the Secretary that the remuneration paid by such employer for such services is subject to a tax imposed by a foreign country which is substantially equivalent to the taxes imposed by this chapter.
 (5) CROSS REFERENCE- For relief from taxes in cases covered by certain international agreements, see sections 3101(c) and 3111(c).'.
 (b) Social Security Benefits- Subsection (e) of section 210 of the Social Security Act (42 U.S.C. 410(e)) is amended--
 (1) by striking `(e) The term' and inserting `(e)(1) The term',
 (2) by redesignating clauses (1) through (6) as clauses (A) through (F), respectively, and
 (3) by adding at the end the following new paragraph:
 (2)(A) If any employee of a foreign person is performing services in connection with a contract between the United States Government (or any instrumentality thereof) and any member of any domestically controlled group of entities which includes such foreign person, such foreign person shall be treated as an American employer with respect to such services performed by such employee.
 (B) For purposes of this paragraph--
 (i) The term `domestically controlled group of entities' means a controlled group of entities the common parent of which is a domestic corporation.
 (ii) The term `controlled group of entities' means a controlled group of corporations as defined in section 1563(a)(1) of the Internal Revenue Code of 1986, except that--
 (I) `more than 50 percent' shall be substituted for `at least 80 percent' each place it appears therein, and
 (II) the determination shall be made without regard to subsections (a)(4) and (b)(2) of section 1563 of such Code.
 A partnership or any other entity (other than a corporation) shall be treated as a member of a controlled group of entities if such entity is controlled (within the meaning of section 954(d)(3) of such Code) by members of such group (including any entity treated as a member of such group by reason of this sentence).
 (C) Subparagraph (A) shall not apply to any services to which paragraph (1) of section 3121(z) of the Internal Revenue Code of 1986 does not apply by reason of paragraph (4) of such section.'.
 (c) Effective Date- The amendment made by this section shall apply to services performed in calendar months beginning more than 30 days after the date of the enactment of this Act.
 SEC. 303. INCREASE IN MINIMUM PENALTY ON FAILURE TO FILE A RETURN OF TAX.
 (a) In General- Subsection (a) of section 6651 is amended by striking `$100' in the last sentence and inserting `$135'.
 (b) Effective Date- The amendment made by this section shall apply to returns required to be filed after December 31, 2008.
I Don't Pretend to Understand All This: I am now going to contact my US accountant, and hopefully he can read this, understand it, and explain it to me. When he does, I'll explain it to you. In the meantime, I thought you might like to know.
Copyright 2008 by Don Winner for Panama-Guide.com. Go ahead and use whatever you like as long as you credit the source. Salud.

By sloopskipper on Jun 16, 2008, 21:55 in Friendly Talkzone.

sloopskipper says on Jun 17, 2008, 07:13:

Doc, I spent a little time looking at this, but there IS a lotta stuff! It appears that you are considered an ex-pat if you don't spend 30 days in the U.S. in a calendar year.

But I have not yet been able to really understand the implications. Winner mentioned he will consult with gringo accountants, I'll keep you advised of whatever I hear.

0 funny, 0 helpful.

rjstuff says on Jun 17, 2008, 09:29:

I couldn't find anything of value in this long post (didn't look too hard either) - Seems like for someone like me - who has his retirement from US sources (many expats might fall into this category) - we continue to pay taxes to US Govt. in nay case and this maybe only targeting those that earn money outside of USA but do not pay US taxes - many of us do not intend to fall into this category in any case. I expect to keep paying US taxes (federal only) on my retirement income and any interest income I make on my assets in Colombia (once I move there) - hence I belive this does nothing to people like me. Good Luck

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sloopskipper says on Jun 17, 2008, 11:11:

rjstuff, seems that you are right.

I am hoping to see some clarification but it seems that it mostly affects the ex-patriot who has substantial foreign earnings and no real effect on taxes on pensions or investments in the U.S.

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lpdiver says on Jun 17, 2008, 14:13:

Hmmm maybe those other passports will be usefull after all.

t

"cook some rice!"

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tejasmarcos says on Jun 17, 2008, 16:59:

they will not..... especially cash and what you do not show the Colombian government. i guess DIAN is Colombia's version of the IRS?

trying to walk a straight line on sour mash and cheap wine...

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sloopskipper says on Jun 17, 2008, 17:37:

Rubito says on Jun 17, 2008, 16:57: flag

"How the hell are they gonna know how much money I make in Colombia?"

With the 'Patriot Act" they probably know EVERYTHING!

But if I can understand a little of this bullshit, you only owe the IRS if you earn more than $80 or 84,000 abroad.

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truthspeaker says on Jun 17, 2008, 21:07:

"Unless they actually want to put someone on my ass and watch while i get paid in CASH"
Wait a minute...
you get paid on/for your ass?

Remember, I can only tell the truth. No more Sex Tourism in Colombia.

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tejasmarcos says on Jun 18, 2008, 05:59:

LOL!

trying to walk a straight line on sour mash and cheap wine...

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rjstuff says on Jun 21, 2008, 08:57:

sloopskipper says on Jun 17, 2008,
But if I can understand a little of this bullshit, you only owe the IRS if you earn more than $80 or 84,000 abroad.

Yes, but you can only exclude 'earned' income - you will still be taxed fully on passive income like pension, interest on bank accounts and capital gains (sale of property like your house). But I believe its status quo for most pensioners and you have to self report things like a 'foreign bank account' - the penalty for non reporting is severe (like $10,000) but you only need to worry if you have ties to USA (if you do not intend to have any ties with USA then probably it doesn't matter). I need to find the form number for this but not till later.

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sloopskipper says on Jun 21, 2008, 09:36:

From my understanding that the $80 or 84K is "earned Income" earned outside the U.S. It seems that the foreign income (including housing allowances, etc.) is then taxable by the IRS.

And I also revisited Turbo-Tax and it appears that you must only disclose foreign bank accounts, etc, when combined balances exceeded $10,000 at some time during the tax year.

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rjstuff says on Jun 22, 2008, 08:13:

Yes docwilliam is right also - some military pensions are non-taxable and also if the pension is below a certain amount it is non-taxable; but for us civilian types earning a somewhat bigger pension - its all taxable.

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tomtom33 says on Jun 22, 2008, 10:11:

Unfortunately, Doc, right has nothing to do with tax law. How about the inheritance tax? You have never been taxed on your pension money, but you have already been taxed building your nest egg.

The art of taxation is like the art of down collection. You want to get the most amount of down with the least amount of hiss.

Then you must realize that tax law is formed by committee. The same committee that was assigned to design the horse but created the camel.

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