Unlike most countries, the United States taxes its citizens on worldwide income, whether or not they are resident in the United States. To deter tax avoidance by abandonment of citizenship, the United States imposes an Expatriation Tax on those who abandon U.S. citizenship. The tax also applies to green-card holders who abandon U.S. permanent residence, if they have been resident for 8 of the last 15 years, whether or not they are emigrating to avoid tax.
The first law to authorize taxation of former citizens was passed in 1966; it created Internal Revenue Code Section 877, which allowed the U.S.-source income of former citizens to be taxed for up to 10 years following the date of their loss of citizenship. Section 877 was first amended in 1996, at a time when the issue of renunciation of U.S. citizenship for tax purposes was receiving a great deal of public attention; the same attention resulted in the passage of the Reed Amendment, which attempted to prevent former U.S. citizens from obtaining visas, but which was never enforced. The American Jobs Creation act of 2004 amended Section 877 again. Under the new law, any individual who had a net worth of $2 million or an average income tax liability of $139,000 for the five previous years who renounces his or her citizenship is automatically assumed to have done so for tax avoidance reasons and is subject to additional taxes. Furthermore, with certain exceptions covered expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation were subject to US taxation as if they were U.S. citizens or resident aliens.
The HEART Act, passed on 17 June 2008, created the new Section 877A, which imposed a substantially different expatriation tax from that of the earlier Section 877. Under the new expatriation tax law, effective for calendar year 2009, "covered expatriates", i.e. those who have a net worth of $2 million, or 5 year average income tax liability exceeding $139,000, are treated as if they had liquidated all of their assets on the date prior to their expatriation. Under this provision, the taxpayer's net gain is computed as if he or she had actually liquidated their assets. Net gain is the difference between the fair market value (theoretical selling price) and the taxpayer's cost basis (actual purchase price). Once net gain is calculated, any net gain greater than $600,000 will be taxed as income in that calendar year. The tax applies whether or not an actual sale is made by the taxpayer, and whether or not the notional gains arise on assets in the taxpayer's home country acquired before immigration to the United States. It is irrelevant that the gains may have partly arisen before the taxpayer moved to the U.S.
The new tax law also applies to deferred compensation ( 401(a), 403(b) plans, pension plans, stock options, etc.) of the expatriate. Traditional or regular IRAs are defined as specific tax deferred accounts rather than deferred compensation items. If the payer of the deferred compensation is a US citizen and the taxpayer expatriating has waived the right to a lower withholding rate[clarification needed], then the covered expatriate is charged a 30% withholding tax on their deferred compensation. If the covered expatriate does not meet the aforementioned criteria then the deferred compensation is taxed (as income) based on the present value of the deferred compensation.