The concept of a Wealth Tax has resurfaced as a possibility in the U.S. again in recent days. It is too early to predict the likelihood of it becoming law, but it is worth noting that a piece of legislation titled the “Ultra-Millionaire Tax Act for 2021” has been proposed.
If enacted, it would provide for:
- A 2% annual tax on the net worth of households and trusts between $50 million and $1 billion, and
- A 1% annual surtax (3% tax overall) on the net worth of household and trusts over $1 billion.
It is not expected to become effective until after 2022 (if then). However, this proposed effective date will need to be monitored. The proposal also anticipates that some U.S. citizens may want to relinquish so as do avoid its impact altogether.
At their present time there is already a comprehensive body of law that provides for tax consequences of relinquishing U.S. citizenship. The proposal, if enacted will make a significant addition to these already harsh rules.
A summary of the current rules is as follows:
If a former taxpayer met certain net worth criteria or prior year’s tax liabilities they are classified as a “covered expatriate” when they relinquish their U.S. citizenship. A covered expatriate is subject to a special tax regime as follows:
- Exit Tax – Covered expatriates are deemed to have sold all their assets on the date of expatriation.
- Capital gain retains its character as capital gain – meaning maximum of 23.8% rate; ordinary gain retains its character as ordinary income. – meaning maximum rate in 2021 of 37%
- Covered Gifts and Bequests – U.S. beneficiaries of a covered expatriate are subject to harsh rules when they receive a gift or inheritance from a covered expatriate.
- IRC § 2801 imposes a tax at the maximum estate tax rate (40%) on future gifts or bequests by “covered expatriates” to any U.S. recipients, with certain exceptions. These such gifts or bequests are commonly referred to as “covered gifts” or “covered bequests”. The tax imposed under IRC § 2801 is imposed on the recipient of the covered gift or covered bequest, as opposed to imposed on the donor.
- Exceptions – if an expatriating individual can meet the requirements of some narrow exceptions they will not be classified as a covered expatriate. These exceptions are as follows:
- The taxpayer became at birth a citizen of the United States and a citizen of another country AND, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, AND has been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs OR
- The individual’s relinquishment of United States citizenship occurs before such individual attains age 18 1/2, AND the individual has been a resident of the United States (as so defined) for not more than 10 taxable years before the date of relinquishment. IRC § 877A(g)(1)(B) (citing IRC § 877(a)(2))
Proposed Law: Ultra-Millionaire Tax Act of 2021
– The proposal (if enacted) will add a 40% “exit tax” on the net worth above $50 million of ANY U.S. citizen who renounces their citizenship. In its current form is does not have any exceptions.
