New U.S. expatriation rules, introduced one year ago, governing U.S. citizens or long-time green card holders who wish to renounce their American citizenship are serving as a disincentive for many to make the decision to give up their citizenship.

“In general, we think the new rules have had a chilling effect,” says Kevin Gluc, a Buffalo, N.Y.-based tax partner with Hodgson Russ LLP, who spoke at the 2009 annual conference of the Society of Tax and Estate Practitioners Canada in Toronto today.

Under the rules introduced June 17, 2008, there is a deemed disposition of worldwide assets based on their fair market value on the day before expatriation. A 45% tax is levied on any capital gains above a 2009 capital gains exemption of US$626,000.

Before the new rules came in last year, expatriates were covered by an alternative tax regime on U.S. source income that covered the 10-year period after expatriation. Expatriates were limited to just 30 days’ total of physical presence each year in the U.S. for the ten-year period. Under the new expatriation, that travel limit no longer applies.

For some wealthy individuals, the new rules may be making the decision to renounce U.S. citizenship too financially onerous, Gluc says.

U.S. citizens and green card holders often choose to renounce U.S. citizenship in order to remove themselves from the U.S. tax regime, which, for one thing, obligates them to file a U.S. tax return every year even if they don’t live or earn income in the U.S. They may also make the decision to renounce in order to avoid U.S. estate tax.

Only “covered” expatriates fall under the expatriation rules. Covered expatriates either have a net worth equal to or greater than US$2 million, or have an average tax liability of greater than US$145,000 for the previous five years. Those who have failed to certify compliance with U.S. tax obligations for the last five years — including filing a U.S. tax return — would also be considered a covered expatriate.

U.S. citizens must formally renounce at a U.S. embassy or consulate outside of the U.S. Every quarter, the U.S. government publishes the names of those who’ve renounced U.S. citizenship in a federal register.

Long-term green card holders can give up their green cards at any point of entry into the U.S. Green cards do not expire, but instead must be revoked or administratively determined to be abandoned.

IE