Each year, a number of Americans give up their United States citizenship and move to a country that imposes fewer taxes. It seems like an extreme measure, but some people dislike paying taxes enough to actually do it. Enough people have been doing it that the rules you have to follow have been made much more stringent over recent years. The recently enacted Heroes Earnings Assistance and Relief Tax Act of 2008 (“Heart Act”) has replaced the existing 10-year expatriation tax regime and now imposes an exit tax and transfer tax on expatriating citizens or departing long-term permanent residents (i.e., a “green card” holder who has held a green card for at least eight of the prior fifteen years).

Under the exit tax provisions, an expatriating citizen, or a permanent resident, will be taxed as though he had sold his assets at fair market value when he expatriates, if the resulting gain would exceed $600,000 and he meets certain fairly low thresholds of income and net worth.

Under the new transfer tax provisions, if such an expatriate later makes a gift or bequest to a U.S. citizen or permanent resident, the donee will be subject to a transfer tax determined at the highest marginal estate or gift tax rate unless the transfer is subject to estate or gift tax and is properly reported by the expatriate or his estate, or the transfer would be eligible for an estate or gift tax charitable deduction or marital deduction if the transferor were a U.S. person. This new transfer tax also applies to transfers to domestic trusts and to certain distributions to U.S. beneficiaries from foreign trusts to which the expatriate made gifts or bequests. The new expatriation tax regime is applicable to citizens and long-term residents expatriating on or after June 17, 2008.

The new law is likely to achieve a good part of its intended impact of stemming the tide of taxmotivated departures from the United States. At the same time, it will significantly complicate and limit the planning available for U.S. citizens and, particularly, long-term resident aliens with legitimate nontax reasons for changing their status. In particular, green card holders who have not yet held their green cards for eight years should review the rules of the Act and their potential impact if the eight-year threshold is exceeded.