Recent changes to the tax rules applicable to U.S. citizens and lawful permanent residents (i.e., green card holders) who expatriate may make cutting ties with the United States significantly more costly. The Heroes Earnings Assistance and Relief Tax Act of 2008 introduced a new regime of taxation that applies to “covered expatriates,” certain individuals who give up their U.S. citizenship or terminate their status as permanent residents. The new rules are contained in Sections 877A and 2801 (all “Section” references are to the Internal Revenue Code).

Section 877A imposes an exit tax on the worldwide property of covered expatriates, and Section 2801 imposes a tax on U.S. citizens and residents who receive gifts or bequests from covered expatriates. On Oct. 15, 2009, the Internal Revenue Service (IRS) issued Notice 2009-85, which provides welcome guidance about the exit tax. The new tax regime, which constitutes a major departure from prior law, applies to individuals who expatriate on or after June 17, 2008.

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