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Jun 2008
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In Brief:
On 17 June 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act. This bill includes measures on both individual expatriation and employment taxes related to employees working outside of the US on government contracts. These measures were described in greater detail in our global watches dated 28 May 2008 and 30 May 2008 respectively. |
On 17 June 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act (HR 6081) into law. HEART, otherwise known as the military bill, extends or modifies several tax benefits for active-duty and former military service members. These benefits range from housing assistance to favorable tax treatment of some types of service compensation.
As with most legislation of this type, the bill also included several revenue offsets for these new provisions.
Exit tax
As outlined in our 28 May 2008 Global Watch, the first of these revenue offsets is the replacement of Internal Revenue Code S.877 with new Internal Revenue Code S.877A. Under the new S.877A rules, a US citizen who relinquishes his/her citizenship, or a long-term resident who terminates permanent residence status would be subject to a "mark-to-market" tax if the individual met one of three objective tests.
The mark-to-market tax effectively would subject these individuals to tax on the net unrealized gains on their world wide property as if such property were sold for the fair market value on the day before the expatriation date.
New Federal Insurance Contributions Act (FICA) requirement
Another revenue offset of the HEART Act is a provision intended to prevent US contractors from circumventing US payroll taxes by hiring employees through offshore companies. The provision provides that compensation for services performed outside of the US by an employee of a "foreign person" in connection with a contract between the US government (or any instrumentality thereof) and any member of any domestically controlled group of entities (which includes the employee's foreign employer) will generally be subject to FICA. Thus, a US citizen or green card holder, working abroad for a foreign employer may be subject to US FICA tax. More information on this provision is available in our 30 May 2008 Global Watch.
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"The Bottom Line"
The bill signing date sets the effective date for individuals whose expatriation date is on or after the date of enactment. It also sets the effective date of the foreign contractor employment tax-avoidance measure. In this case, it is effective for services performed in calendar months beginning more than 30 days after the date of enactment. | Note: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. |
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