You work hard for your money...

So hard for it honey.
You work hard for your money
and it just don't treat you right!

Donna Summer...What a gal! She did well with that one. And she is still getting paid! But, the money sure doesn't go as far as it used to, nowadays...So, do you think she is thinking of leaving the Unites States if McCain gets elected? I would imagine that the thought has passed through her brain, just as it seems to be through a lot of my blog readers.

You see, the most read page on my blog is on a topic regarding the new Exit Tax Bill that our fabulous Representatives UNANIMOUSLY voted in. For your reference you can find the blog entry HERE. Perhaps they couldn't find anything else to tax, so they decided to tax one's future income. Did you get that? They tax UNREALIZED gains if someone feels that this country is going to shit in a handbasket and they decide they wish to leave. That term is called to expatriate one's self. Also, they decided that they were going to tax that person's worldwide assets, not only what is held in the United States. Did you know that this is the ONLY country on this floating blue marble that does this?! One must give up one's passport to have this wrath come upon them. Which is quite a serious thought, but it has been catching more attention lately, as I can attest that this blog has seen a lot of interest in this topic. Ironic, that McCain's numbers are up a bit just like the searches for this topic.

This taxing of the unrealized gains is more known as a ‘mark-to-market' tax which applies to the net unrealized gain on the expatriate's worldwide assets. That is to say that if such property were sold (the ‘deemed sale') for its fair market value on the day before the expatriation date any net gain on this deemed sale in excess of US$600,000 is taxable. Well, most American's will never have to worry about this issue...or will they? You would think that this means that it is only for the rich, but it gets a little more close to home as you will find...

If you are a Trustee, of a non-grantor trust, now you must withhold and pay the IRS 30% of the portion of any distribution that would have been taxable to the expatriate had they not expatriated. In other words, you have to pay 30% as if the person never left the country. Failure to withhold the tax could subject the you, the trustee, to direct liability for the unpaid tax. That said, before you become a trustee for your well off sibling, parents, or in-laws, you might want to make sure things are square or you could be holding the bag...

To give you a bit of background on this term, the practice of mark to market first developed among traders on futures exchanges in the 19th century. It was not until the 1980s, (remember The Keating Five...uh, Bush's older brother...Those same people that are now working on McCain's campaign...Anyway,) that the practice spread to big banks and corporations far from the traditional trading pits, and beginning in the 1990s, mark-to-market accounting began to give rise to scandals.

To help better understand the original practice, we'll use a futures trader for our example. When this trader is taking a position, he/she deposits money with the exchange, called a "margin". This is intended to protect or "hedge" the exchange against loss. At the end of every trading day, each contract is marked to its present market value of the day. If the trader is on the winning side of a deal, then their contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if they are on the losing side, the exchange will debit their account. If they cannot pay this debt, then the margin is used as the collateral from which the loss is paid.

As the practice of marking to market caught on in corporations and banks, some of them seem to have discovered that this was a tempting way to commit accounting fraud, especially when the market price could not be objectively determined, so assets were being 'marked to model' using estimated valuations derived from financial modeling, and sometimes marked to fantasies. (Google Enron and/or the Enron scandal and you will see what I mean)

The Internal Revenue Code Section 475(some simple fun and humorous reading on the subject) contains the mark to market accounting method rule. Section 475 provides that dealers that elect mark to market treatment shall recognize gain or loss as if the property were sold for its fair market value on the last business day of the year, and any gain or loss shall be taken into account in that year. The section also states that one can elect mark to market treatment for any commodity (or their derivatives) which is actively traded (i.e., for which there is an established financial market that provides a reasonable basis to determine fair market value by disseminating price quotes from broker/dealers or actual prices from recent transactions) This might be a time that we will be seeing people, or shall I say mortgage backed security firms, using this Tax Code in order to stave off or be able to write down some of their real estate losses as well. Interesting, but I again, digress...

I don't want to digress too much here, but I thought I would just get into it a little so that people would be able to make reference and understand where this is going. You might be asking yourself if it would apply to me? Well, not everyone, but certainly A LOT of people in this country.

The Act applies to any expatriate if that individual (a) has a net worth of US$2 million or more; (b) has an average net U.S. income tax liability of greater than US$139,000 for the five year period prior to expatriation; or (c) fails to certify that he has complied with all U.S. federal tax obligations for the preceding five years (the ‘covered expatriate'). So, giving up a U.S. passport now carries a steep price tag. This new law enacted on June 17th, 2008 subjects certain individuals who expatriate or those who give up their green cards to immediate tax on the inherent gain on all of their worldwide assets and a tax on future gifts or bequests made to a U.S. citizen or resident. It seems that item A is catering to the more wealthy individuals, while item B holds a larger share of the general puclic, but item C can cover anyone who has failed to file taxes during any of the previous 5 years, perhaps an extention, or tax lien would make issue.

The Act consists of three key elements:

1. The mark-to-market tax on the covered expatriate's worldwide assets;
A. The tax now applies to the net unrealized gain on the covered expatriate's worldwide assets as if such property were sold for its fair market value on the day before the expatriation date to the extent that the net gain exceeds US$600,000. NOTE:the mark-to-market tax does not apply to (i) certain deferred compensation items; (ii) certain specified tax deferred accounts; or (iii) any interest in a nongrantor trust.


Deferred Compensation Items

Under the Act, certain deferred compensation items are subject to the mark-to-market tax. The covered expatriate is deemed to receive the present value of his accrued benefit on the day before the expatriation date. No early distribution excise tax applies by virtue of this treatment, and appropriate adjustments must be made to subsequent distributions from the plan to reflect such treatment.

Other qualifying deferred compensation items are not subject to the mark-to-market tax; however, the payor must deduct and withhold a tax of 30 percent from any taxable payment to a covered expatriate. A taxable payment is subject to withholding to the extent it would be included in the gross income of the covered expatriate if such person were a U.S. citizen or resident.

Specified Tax Deferred Accounts

Under the Act, the mark-to-market tax applies to certain specified tax deferred accounts. In the case of any interest in a specified account held by a covered expatriate on the day before the expatriation date, the expatriate is deemed to receive a distribution of his entire interest in the account on that date. Appropriate adjustments are made for subsequent distributions to take into account this treatment. These distributions are not subject to additional tax.

Interests in Non-Grantor Trusts

The Act makes a distinction between grantor trusts and non-grantor trusts. A grantor trust is ignored as a taxable entity for U.S. federal income tax purposes. The ‘owner' of a grantor trust must include in computing his personal tax liability the items of income, deduction and credit that are attributable to the trust. Therefore, in the case of the portion of any trust for which the covered expatriate is treated as the owner under the grantor trust provisions, the assets held by that portion of the trust are subject to the mark-to-market tax.

The mark-to-market tax does not generally apply to non-grantor trusts. Rather, in the case of any direct or indirect distribution from the trust to a covered expatriate, the trustee must deduct and withhold an amount equal to 30 percent of the distribution portion that would be included in the gross income of the covered expatriate if he were subject to U.S. income tax. The covered expatriate waives any right to claim a reduction in withholding under any treaty with the U.S. The Act does not really explain how the withholding will be enforced against a non-U.S. trustee of a trust. That said, one might think of having one's Trustee be a resident or a country outside of the United States, perhaps.

In addition, if the non-grantor trust distributes appreciated property to a covered expatriate, the trust recognizes gain as if the property were sold to the expatriate at its fair market value.

If a non-grantor trust becomes a grantor trust of which the covered expatriate is treated as the owner, such conversion is treated as a distribution to the covered expatriate and will trigger the 30 percent withholding tax.

Conversely, if a grantor trust becomes a non-grantor trust after the individual expatriates, it appears that the mark-to-market tax applies to assets in the grantor trust, and the 30 percent withholding requirement does not apply to the trust once it becomes a non-grantor trust. This is an important point because the grantor's expatriation commonly converts grantor trusts into non-grantor trusts.

2. A tax on certain gifts and bequests made by the covered expatriate to any US person; and...
A. The Act taxes certain ‘covered gifts or bequests' received by a U.S. citizen or resident. The tax, which is assessed at the highest marginal estate or gift tax rate at the time of the gift or bequest, applies only to the extent that the covered gift or bequest exceeds $12,000 during any calendar year. The tax is reduced by the amount of any gift or estate tax paid to a foreign country with respect to such covered gift or bequest. No allowance appears to exist for the $1 million exemption from U.S. gift tax or the $2 million exemption from U.S. estate tax normally granted to U.S. persons. Gifts or bequests made to a U.S. spouse or a qualified charity are not subject to the tax. So, perhaps one needs to create an offshore 501c3 (not 501a as you will see below) company to which you can fuel with your $1M-$2M, or $12,000 for that matter, and...again, I digress....

In the case of a covered gift or bequest made to a U.S. trust, the tax applies as if the trust were a U.S. citizen, and the trust is required to pay the tax. In the case of a covered gift or bequest made to a foreign trust, the tax applies to any distribution, whether from income or corpus, made from such trust to a recipient who is a U.S. citizen or resident, in the same manner as if such distribution were a covered gift or bequest.

3. A repeal of the current so-called 10-year shadow period for covered expatriates.
A. Prior law subjected expatriates to a so-called 10-year shadow period, which resulted in a covered expatriate being taxed as a U.S. citizen in any of the 10 years following expatriation in which the expatriate spent 30 days in more in the U.S. In addition, prior law taxed expatriates on all U.S. source income and gain during the shadow period.

Under the Act, individuals who expatriate on or after the date of enactment are not subject to the shadow period but are instead subject to the mark-to-market tax and the tax on gifts and bequests to U.S. citizens and residents.

You know the statement, "they got you coming and going..." I will continue to research more on this topic for those interested. This was hidden within the Heroes Earning Assistance and Relief Tax (HEART) Act (the ‘Act'), which provides tax relief for active duty military personnel and reservists. I am sure that there are great ideas and tax relief for those people, and rightly given as they are well underpaid for their service to their country, but this is simple pork added to a bill. The unanimous voting was for the other inclusive issues within the bill...

I am not condoning the attempt to bypass this Act. I am simply playing the devils advocate, as I am sure there are loopholes that the rich know of and will utilize. This is how things work!


Bibliography;
IRS, Sovereign Society, Taxpat, Wikipedia, Withers Worldwide