Matters of the HEART (Act) – Part Five

This is the fifth, and final, in a series of blogs discussing the rules for expatriates under the 2008 Heroes Earnings Assistance and Relief Tax (HEART) Act. Prior blogs regarding this topic have discussed various pitfalls for those defined as “covered expatriates” under the HEART Act.

Another pitfall in the HEART Act is a transfer tax, which must be paid by the recipient (not the covered expatriate), on the receipt of property from a covered expatriate.  It’s very much like an estate or gift tax because the tax is calculated by multiplying the fair market value of the transferred property by the highest applicable estate or gift tax at the time of the transfer. (A slight mitigation is that this tax may be reduced by any foreign transfer taxes paid on the transfer.)

The rules under this transfer tax present a number of planning opportunities, as well as possible pitfalls. For instance, certain pre-expatriation gifts may mitigate the application of the HEART Act itself by getting the expatriate under certain net worth qualification as a covered expatriate (which were covered in Part Two under the Net Worth Test).

Showing a little heart, this transfer tax scheme is not entirely the same as for estate and gift taxation.  The HEART Act has rules that attempt to eliminate double taxation.  A transfer that is taxed under the “regular” estate and gift taxation is exempt from the HEART Act transfer tax.  So if you make a gift and pay gift taxes under the “regular” gift tax rules, you will not have to pay an additional transfer tax under the HEART Act.

But, like most IRS rules of this type, there is a caveat.  You are relieved of double taxation ONLY IF the transfer is reported in a “timely filed” return. Failure to timely file the estate or gift tax return could result in double taxation on the transfer – a tax imposed on the recipient under the HEART Act as well as estate and gift tax on the donor/expatriate under the estate and gift tax rules.

If you are a covered expatriate who owns property and plan to expatriate from the United States, then failure to properly consider the tax implications of the HEART Act may result in unnecessary taxation.  So if you plan to relinquish your US Citizenship, or have been a long-term resident in the United States and plan to leave, and you seek to eliminate or, at least, minimize the tax liabilities that may result, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.