RELINQUISHING US citizenship for tax purposes now carries a steeper price tag after a new law, the Heroes Earnings Assistance and Relief Tax (HEART) of 2008, was enacted on June 17.

The Heroes act - so named for its tax relief provisions to US military personnel and their families - offsets those relief costs by tightening restrictions on covered expatriates, that is US citizens or foreign-born green card holders with a net worth of $2 million or more who relinquish US citizenship.

Covered expatriates are also defined as those who owed more than $124,000 (as adjusted for inflation; $139,000 in 2008) in US income taxes on average over the five years before expatriation. The act’s “exit tax” penalizes covered expatriates by taxing all their assets as if they were sold at market value on the day before the person’s expatriation.

In other words, one must pay capital gains on assets that have increased in value, even though they have not yet been sold. This so-called mark-to-market tax applies to the net unrealized gain on the covered expatriate's worldwide assets - stock portfolios, real estate, art, and so on. Any net gain in excess of $600,000 is taxable.

In addition, trustees of non-grantor trusts (trusts which do not treat the covered expatriate as the owner) must withhold and pay over to the US Internal Revenue Service (IRS) 30% of the portion of any distribution (whether direct or indirect) that would have been taxable to the covered expatriate had she or he not expatriated. Failure to withhold the tax could subject the trustee to direct liability for the unpaid US tax.

Another significant change is a provision that taxes US heirs on amounts given or left to them by ex-US citizens. Taxing the recipient instead of the donor makes it harder to get around tax laws.

Any property left to a US person from an ex-citizen will be taxed at the highest marginal estate or gift tax rate at the time of the gift or bequest, currently 45%.

Gifts or bequests made to a US spouse or a qualified charity are exempted as is the first $12,000 gifted or bequested in any calendar year.

Because trust distributions may occur many years after expatriation and bequests will only occur upon death, covered expatriates will need to consider their US tax obligations for the rest of their lives.

Green card holding foreign executives, academics, foreign born spouses of Americans, etc - beware. If you worked in the US, even sporadically, during eight of the years that you were there (even one day’s work in a given year makes that year “count”) and repatriate to France, you must continue to file US tax returns on your worldwide income.

Failure to do so could prevent you from re-entering the US in the future.

Prior law defined a covered expatriate by the same financial criteria (eg worth $2 million and above) but offered a more lenient ten-year shadow period, requiring them to pay US taxes on only US-source income and gain for any of the ten years following expatriation (in which the expatriate spent 30 days or more in the US). Estate and gift taxes, (ie. assets such as stock in US companies transferred during that period) were subject to taxation, encouraging expatriating citizens to wait until the ten-year period expired before liquidating their US assets.

These laws continue to apply to those who have expatriated before June 17, 2008; but under the Heroes act, the ten-year transition rule has been abolished. And if you are not worth $2 million?

IRS licensed tax agent Mike Habib, specializing in solving international tax problems (MyIRSTaxRelief.com) points out the act’s effect on the average Joe.

“It increases the minimum penalty for a failure to file your tax return (within 60 days of the due date) to a minimum of $135 (up from $100) or 100% of the amount of tax required to be shown on the return,” he said.

“It’s effective for tax returns to be filed after 2008, so get your tax house in order now,” he added.

In 2007, only 470 Americans renounced their citizenship - a minuscule amount, but the fortunes they took with them got Capital Hill’s attention. While the simplicity of the new one-time tax may appeal to some, its obvious intention is to deter financial emigration. It should also give pause to non-US persons who are considering obtaining green cards as the cost of leaving the US in the future may be very high.