Senator Warren’s Proposed Wealth Tax and the 40% Tax Hit on Expatriation

The ‘‘Ultra-Millionaire Tax Act of 2021’’ (the “Act”) was proposed by Democratic Senators Elizabeth Warren and Bernie Sanders on March 1 2021.  Like all other tax proposals I have seen in my over 35+ years of tax practice, once the bee is in the bonnet, legislation will inevitably, inexorably, eventually blossom and flourish.  The Act seeks to narrow the US “wealth gap” and address wealth inequality which has grown wider during the COVID-19 pandemic.

I will be posting a more detailed blog post on this topic very soon. This short post serves as a head’s up for those planning on expatriating (that is, giving up US citizenship or a green card held for at least 8 tax years). You must act before the wealth tax becomes law!

For those living in countries where the US embassy or consulate is not handling expatriation matters, I can probably help you get an appointment at the US consulate in Dubai. I have been successful in getting my clients single-meeting appointments to expatriate.  Further details here.  Email me for more information  vljeker@us-taxes.org

Brief Overview of the Wealth Tax & the Impact on Expatriation

For purposes of this post, all amounts are in USD.

The Act calls for an annual “wealth tax” to be assessed on an “applicable taxpayer’s” net worth (my future blog post will discuss who qualifies as an “applicable taxpayer”).  The rate is 2% on the net worth ranging from 50 million to $1 billion and 3% on wealth exceeding $1 billion. Net worth means assets/property/cash (in short, everything you own anywhere in the world) reduced by debts.

Anyone who is a so-called “covered expatriate” (CE) and has met the wealth thresholds set out above, is in for a very nasty surprise if and when the Act becomes law!  As my readers already know, being a “covered expatriate” is not a good thing. Full information about the so-called “exit tax” imposed on the CE and the special 40% transfer tax on US recipients of any gift or bequest at any time in the future from a CE is at my blog post here.  The US tax laws eat up not only the CE, but see to it that any US person in the inner circle of the CE pays the US government a hefty price as well.

No Laughing Matter

The Act now adds insult to injury.  In addition to the exit tax, the wealthy CE will be required to pay an additional 40 percent tax on net wealth as if the calendar year ended on the day before the expatriation.  This is not a typo. That number is 40%!

Here’s a very realistic example: Let’s say Joseph was born in the US because his parents, who were Italian citizens, were employed in the US at the time. Assume Joseph lived in the US until the age of 5 and then returned to Italy with his parents. Assume he attended 4 years of college in the US as well.  Assume Joseph moved to England and Joseph gives up his US citizenship. Assume Joseph is a “covered expatriate” with a net worth of $53 million on the expatriation date. This significant wealth leaves him in the cross-hairs of the wealth tax.

For the sake of simplicity, let us say his exit tax amounts to $1 million and that he cannot use the exit tax to reduce net worth for purposes of the wealth tax.  In addition to the exit tax of $1 million, Joseph will owe $1.2 million in wealth tax in order to escape Uncle Sam’s clutches ($3 million, which is the excess over $50 million threshold x 40%). Total US tax bill so far is $2.2 million.  But Uncle Sam is not done yet!  At Joseph’s death, let’s assume he leaves $25 million to his children and they are US persons.   Uncle Sam will take another $10 million from them simply because they must be punished by a special transfer tax, since their father was a covered expatriate. So, while Joseph and his heirs started off with $53 million, once Uncle Sam got through with them, Uncle Sam got $12.2 million and Joseph and his family got only $40.8 million.  That’s right. Uncle Sam took close to 23% of their wealth, all because Joseph simply gave up his citizenship (or green card held for at least 8 tax years).

I was interviewed today by John Richardson about the proposed Wealth Tax. You can access the podcast here.

Posted March 7, 2021

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