The US “expatriation tax” and the the incentive to apply for a Green Card and/or remain in the USA

America doesn’t really need skilled immigrants, or does it?

The above tweet references a post that references a comment by Victoria Ferauge:

Clearly a potential immigrant to the U.S. with assets in the home or a third country would have to have a special kind of insanity to subject himself to this system with all the paperwork and potential for double-taxation. And it would do this person absolutely no good whatsoever to become a U.S. citizen since this would change nothing. On the contrary, being a citizen would actually make it worse – one might shed a Green Card relatively easily (if done before the immigrant acquired too many assets in the U.S. or abroad) but U.S. citizenship is forever unless one renounces.

You know, if I were tasked with designing a system with the maximum number of disincentives in order to prevent educated immigrants with existing assets to come to the U.S., I doubt could have done better than this. While this system has existed for some time, it was not well known until FATCA brought all these issues to light and the IRS actually started enforcing the rules. Most immigrants were never aware of them and many are now in a terrible position made all the worse because they cannot vote. I wonder if the French diaspora in the U.S. has brought this up with Mr. Courtial.

As for potential immigrants like my spouse, they have a lot of thinking to do. I suspect that the young, educated, childless ones will continue to go to the U.S. but I doubt they will naturalize and surely they will have every interest in limiting their stay. Older experienced workers with families and assets in the home country will probably avoid the U.S. in favor of places like Singapore or Canada.

Who could have known? Well at least one lawyer …

Circa 2006:

In 2006, Charles Bruce was one of the authors of a remarkably prescient article about the “Exit Tax”. Rather than write about the “Exit Tax” from the perspective of punishing the small number of U.S. residents who might expatriate to avoid taxes, Mr. Bruce focused on how the “Exit Tax” would affect the majority: citizens and residents of other nations with a U.S. place of birth. His warnings to NOT enact an Exit Tax were ignored. Today the S. 877A “Exit Tax” overwhelmingly affects Americans abroad which include accidental Americans. The article also noted how an “Exit Tax” would affect incentives to immigrate to America.

The article included:

Imposition of an exit tax will discourage highly skilled immigrants from coming to and staying in the United States.9 An exit tax will cause people wanting to work in the United States to avoid applying for a green card.

The avenue of choice will become one of the nonimmigrant visas. Those include specialty workers (H-1B), intracompany transferees (L-1), treaty traders and investors (E-1/E-2), persons of extraordinary ability (O-1), artists and entertainers (P-1/-2/-3), religious workers (R-1), and North American Free Trade Agreement treaty professionals (TN). The system will become more problematic and more arbitrary. The H-1B category is already overrun. The treaty trader/treaty investor (E-1/E-2) category is only available to nationals of a country that has a Treaty of Friendship, Commerce, or Navigation or equivalent treaty with the United States.10 Aspects of the exit tax, as a practical matter, are frankly unenforceable. Since the tax is not actually collected before or at the time of expatriation, if it is not paid, it will in all likelihood have to be collected from an individual living outside the United States with assets outside the country. There is no mechanism for doing that. A U.S. individual receiving a bequest from her aunt in Germany has no way of knowing reliably that her aunt resided years ago in the United States as a legal resident for eight or more years before leaving. How can the IRS realistically hope to catch transfers that pass from the aunt to someone else, from that person to a third person, and from that person to the U.S. recipient? Those cases involve individuals and families, not big companies with audit committees and armies of accountants and attorneys, all subject to the Sarbanes-Oxley rules. Also, since the exit tax creates a deemed sale, often it will engender difficult valuation problems.

You can read this insightful article here:


Present day 2016:

The above tweet references a comment by a former Green Card holder who left the United States because of the Exit Tax. The post is called “All Roads Lead To Renunciation” and is about the renunciation of a “long term” U.S. citizen living abroad.

The complete comment reads:

The_Animal1970 wrote: By that reasoning, I should be grateful to the thief who breaks into my home in the night and robs me blind for “teaching” me how valuable my possessions are.

Sorry, but that comment makes no sense at all.

Look, I genuinely share all of your outrage at the pain and suffering that the US has wrought with its ridiculous policy of CBT, now backed up by the FATCA jihad. Really, I do. I have taken my share of knocks in this area as well, up to what amounted to a nervous breakdown and a prolonged period of anxiety/depression. And even though I saw the writing on the wall and got out nearly a decade ago now, I remain bitter about the way the US tax system treated me (which is why I continue to lurk and post here). It is just that you are wasting good — and righteous — anger here on an inappropriate target. It would be far better to save it for those actually responsible for all of this mess.

Conclusion …

The “Exit Tax” has created an America where:

1. Those considering immigrating to America must accept the reality that, after eight years which results in becoming a “long term resident“, they may not be able to leave without paying an “Exit Tax”; and

2. Those who have immigrated to America must abandon their Green Card before they have lived there for eight years. Otherwise they may have to pay an Exit Tax.

The “foreign asset reporting requirements” have created an America where:

Green Card holders must be extremely vigilant about reporting any financial assets including bank accounts that they retain outside the United States. The assets are considered to be “foreign assets” under U.S. law!

As explained in the post by Victoria Ferauge:

All these people have exactly the same tax and reporting obligations on their worldwide income.  Yes, my friends, an immigrant or a Green Card holder living in the U.S. must report his or her worldwide income to the American IRS, report all his or her foreign bank accounts (even ones back in the home country) and is impacted by FATCA in much the same way as U.S. citizens.

To give you some idea of how this might work in practice, let’s consider a hypothetical situation where my foreign spouse and I return to the U.S. Upon receiving his Green Card my spouse would be:

1.  Required to disclose all his U.S. income AND anything he earned in France (interest, dividends, rents) on assets he acquired before entering the United States.  Depending on the type of income, he may be required to pay U.S. taxes on that French income.
2.  Required to fill out an FBAR (Foreign Bank Account Report) disclosing all of his accounts in France and the balances.
3. And finally he would be required to fill out the new form 8938 (FATCA requirement) revealing his “foreign financial assets” (in other words just about anything he has in France).
4. Last but not least, in theory his bank in Paris would be required to turn over his account information in France to the IRS since by accepting a Green Card and residing in the U.S. he is a U.S. Person (not a citizen, mind you).

Not a pretty picture is it?  Failure to comply with the above may result in draconian penalties even if no tax is due.  I had no idea the U.S. tax system worked this way for immigrants and, I assure you, neither did my French spouse.

“Facts are stubborn things.”