Congress Passes Expat Rules


Just before the Memorial Day holiday, the U.S. House and Senate passed by unanimous consent and voice vote, respectively, HR 6081, the Heroes Earnings Assistance and Relief Tax Act. The act provides benefits to military personnel, funded in part by new rules for taxing individuals who expatriate. The bill also alters the tax treatment of foreign subsidiaries of U.S. companies for employment tax purposes and increases penalties for failure to file returns. President Bush signed the bill on June 17 as Public Law no. 110-245 ( ).

The legislation imposes a mark-to-market regime for taxing unrealized gain of U.S. citizens and long-term U.S. residents (defined at IRC § 877(e)(2)) who expatriate. Most property of a covered expatriate would be treated as sold on the day before the expatriation at fair market value. Gains in excess of $600,000—adjusted for inflation after 2008—would be includible in income and taxed. Also, a gift tax is imposed on U.S. citizens or residents who receive qualifying gifts or bequests exceeding $12,000 (indexed for inflation) from a covered expatriate (or an individual who immediately before death was a covered expatriate). In addition, the act imposes a 30% withholding tax on qualifying deferred compensation payments as well as distributions from certain nongrantor trusts that are paid to a covered expatriate. The withholding tax is imposed in lieu of a mark-to-market tax on such assets.

The provisions generally apply to individuals who expatriate on or after the date of enactment. The withholding approach included in the legislation with respect to deferred compensation and nongrantor trusts was suggested by the AICPA. Other AICPA suggestions incorporated into the legislation are a charitable and marital deduction and the prospective application of the tax on gifts and bequests received on or after the date of enactment, from expatriates whose expatriation date is on or after the date of enactment. See
and .

The AICPA Tax Division’s Expat Task Force worked with the tax-writing committees’ staffs to improve and simplify the legislation’s provisions since it was first considered years ago. Changes since December 2007 include:

Only the new section 877A (not the old section 877) applies to people who expatriate on or after the date of enactment. Old section 877 remains applicable only to people who expatriate prior to the enactment date.

Deferred compensation attributable to services performed outside the U.S. while not a U.S. citizen or U.S. resident is excepted from the application of the provisions, even if the compensation is part of a plan that is otherwise subject to them.

The new tax under section 2801 covering gifts and bequests is prospective from the date of enactment. Unlike in earlier versions of this legislation, it is not retroactive. This provision applies only to gifts or bequests received on or after the date of enactment and only to transfers received from individuals who expatriated on or after the date of enactment.

By AICPA Technical Manager Eileen Reichenberg Sherr, CPA, M. Taxation



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