The Impact Of The Proposed Warren Wealth Tax (and How It Ineracts With FATCA) On Americans Abroad

March 7, 2021 - Participants Include:

Virginia La Torre Jeker - @VLJeker

John Richardson - @Expatriationlaw

 

In the 21st Century the single  most interesting thing about a person is her/her tax residency. The United States makes US citizenship sufficient for tax residency. The effect of US "citizenship-based taxation" is that the United States, imposes worldwide extraterritorial  taxation, on the non-US income of individuals who are tax residents of other countries and do not live in the United States. (The rules of the US extraterritorial tax regime are far more punitive than the tax regime imposed on Homeland Americans.) That's on the income tax side.

In early March of 2021, Senator Elizabeth Warren proposed a US Wealth tax that would apply to the non-US assets (among other things) of US citizens living in other countries. Furthermore, it is drafted in a way that brings the assets of the non-US citizen spouse into the wealth tax net.

In this episode John Richardson and Virginia La Torre Jeker discuss how this is intended to work. Americans abroad considering expatriation should take note of the provision that (in addition to the 877A Exit Tax) the Warren wealth tax, would impose an ADDITIONAL 40% (that's not  a typo)  on "covered expatriates" who renounce US citizenship.

Virginia has supplied the following example in her blog post here, to illustrate the severity of this:

 

"Here’s a very realistic example: Let’s say Joseph was born in the US because his parents, who were Italian citizens, were employed in the US at the time. Assume Joseph lived in the US until the age of 5 and then returned to Italy with his parents. Assume he attended 4 years of college in the US as well.  Assume Joseph moved to England and Joseph gives up his US citizenship. Assume Joseph  is a “covered expatriate” with  a net worth of US$53 million on the expatriation date. This significant wealth leaves him in the cross-hairs of the wealth tax.

For the sake of simplicity, let us say his exit tax amounts to $1 million and that he cannot use the exit tax to reduce net worth for purposes of the wealth tax.  In addition to the exit tax of  $1 million, Joseph will owe $21.2 million in wealth tax in order to escape Uncle Sam’s clutches ($53 million x 40%). Total US tax bill so far is $22.2 million.  But Uncle Sam is not done yet!  At Joseph’s death, let’s assume he leaves $25 million to his children and they are US persons.   Uncle Sam will take another $10 million from them simply because they must be punished since their father was a covered expatriate. So, while Joseph and his heirs started off with $53 million, once Uncle Sam got through with them, Uncle Sam got $32.2 million and Joseph and his family got only $20.8 million.  That’s right. Uncle Sam took 60% of their wealth, all because Joseph simply gave up his citizenship (or green card held for at least 8 tax years)."

Those considering renouncing US citizenship should expatriate at the earliest possible moment!

The proposed legislation (in two places) requires the use of FATCA to assist in the identification of assets outside the United States. John and Virginia discuss the  evolution of FATCA and how it is being used to incrementally expand the US tax base outside of the United States.

Further details may be found at John Richardson's  post here.

You can read the actual  text of Senator Warren's proposal here. You will be shocked!