The Heroes Earning Assistance and Relief Tax (HEART) Act

Non US citizens applying for a US passport/green card need to be put on notice that the HEART Act will impose a US exit tax exposure when and if they give up their green card/US citizenship.

A detailed summary of the proposed legislation can be found here:

In essence this article tells us that when the proposed legislation described is signed into law by George Bush, citizens AND green card holders will be exposed to a US capital gains tax exit charge to the extent of their accrued gains on their world-wide assets if/when they give up their US citizenship/green card.

The Act will apply to any expatriate if that individual

(i) has a net worth of US$2 million or more; or

(ii) has an average net U.S. income tax liability of greater than US$139,000 for the five year period prior to expatriation; or

(iii) fails to certify that he has complied with all U.S. federal tax obligations for the preceding five years (the ‘covered expatriate’).

The Act will contain two exceptions. An individual will not be a ‘covered expatriate’ if he can certify compliance with US federal tax obligations as specified in item (iii) above, and:

(i) he was at birth a citizen of the U.S. and another country, provided that

(a) as of the expatriation he continues to be a citizen of, and a tax resident of, such other country, and

(b) he has been a resident of the U.S. for no more than 10 of the 15 taxable years ending with the taxable year of expatriation; or

(ii) he relinquished U.S. citizenship before reaching the age of 18 ½, provided that he was a resident of the U.S. for not more than 10 taxable years before relinquishment.

On my analysis if A is a UK citizen and say gives up his/her green card and triggers the exit tax, s/he will currently get no UK step up in basis for his/her US tax paid on exit. This is real double taxation. Although the US and the UK have agreed to review their existing 2004 double tax treaty in 2009, I am pessimistic this issue will be resolved in a way satisfactory to the UK given the US displeasure at our recent changes in our rules applicable to non domiciled individuals.

For those assisting in obtaining visas/green cards for those wishing to live in the US, the issue as I see it is that if fee earner UK spouse (“X”) goes to the US for work and has a right to work in the US, his/her spouse needs a green card to live with X. As I see it this very act exposes X’s spouse potentially to the exit charge. My other concern is that the carve out from liability at (a) above is narrow in that if (as I have underlined) X’s spouse has left the US but (say) is now retired in France albeit a UK domiciliary, the carve out seems not to apply.

Those applying for a US passport need to be wary of the proposed exit charge when and if they leave the US.

If you have questions, please get in touch.

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