For over a decade Congress has been obsessing over the fact that a handful of wealthy people, including fund operator John Templeton, Kenneth Dart of Dart Container and Campbell soup heir John Dorrance III were able to escape U.S. income and estate taxes by renouncing their citizenship.

In October of last year, as part of a big corporate tax act, the politicians took another shot at these so-called fleeing 'turncoats' by tightening up a 1996 law that is supposed to extract ten years of taxes from tax-motivated expatriates while they head for the airport. The new, tougher version will cause pain for some moderately well-off expatriates, however the truly wealthy and tax averse will still be able to plan around it.

Under the old law expatriates are able to apply to the IRS for a ruling that confirms they had left the U.S. for nontax reasons and, therefore, were exempt from the ten-year levy. Which was quite a loophole. Half the 270 people applying between the years 1997 through 2002 got favorable rulings, while only 11 got unfavorable ones. The rest got "neutral" rulings, allowing them to proceed as if they didn't owe the tax. In theory the IRS could later audit the "neutral" folks and assess a tax, however there's no evidence this happened.

This loophole is now closed. Under the new law, (retroactive to June 4, 2004), anyone who expatriates and having assets of over $2 million or paid over $620,000 in federal income taxes over the five years prior to leaving is presumed to have left for tax reasons. Only certain dual citizens and minors with few ties to the U.S. are able to get exemptions from the ten years of tax.

Expatriates not fitting one of narrow exceptions will owe U.S. income tax on a wide range of U.S. source income, estate and gift taxes on U.S. assets for ten years. Should they spend more than 30 days in the U.S. during any one of those ten years, they'll be taxed for that year just like U.S. citizens, on all their income from any source. "This is the stinger in the tail," says Dyke Davies, a tax lawyer with Bryan Cave in London. Word of warning to expatriates who are ill: Don't come back for medical treatment. Also, should an expatriate die within a year where he's spent 30 days or more in the U.S., his entire estate is subject to U.S. estate tax.

This new law also requires post-June 3, 2004 expats to file extensive disclosures, ie., worldwide income, days in the U.S., etc., with the IRS, annually for ten years. This is going to be annoying to people who have settled abroad and later expatriate because they're tired of paying accountants' and lawyers' fees in order to comply with U.S. as well as, say, U.K. law, says Davies. "Lots of people give up U.S. citizenship because the compliance drives them nuts," she says. "Now they will still have compliance costs for ten years."

There is one final consideration: A separate 1996 law prevents citizens who have expatriated for tax reasons from returning to the U.S. This could be a threat for many people who may technically be considered to have left for tax reasons. "People are nervous," says Loretta Ippolito, an international tax lawyer with Willkie Farr & Gallagher. "They don't want to take the chance they can't come back to visit their family or for business."

There is good news for anyone contemplating leaving the U.S. for tax reasons, and that is the new law isn't the feared "exit tax" recently passed by the Senate. And it leaves huge holes that the rich and well-advised are able to use in order to avoid paying U.S. taxes. "For someone wealthy enough that expatriation tax is an issue, it's worth paying someone to avoid it," says Richard LeVine, an international tax lawyer with Withers Bergman.

A wealthy expatriate can simply hold on to assets, such as U.S. publicly traded stock, avoiding the gains tax for that ten-year period. Or he can invest through variable annuities whose payout is deferred for at least a decade. And if he has control of a U.S. corporation, he can defer paying himself dividends. Should he need cash sooner, then he can borrow against his U.S. assets. (Loan proceeds don't count as income.)

To avoid being subject to the U.S. estate tax an expatriate has to reside for more than ten years after expatriation or die in 2010, which is the year in which the U.S. estate tax disappears for a year. But he can minimize the potential bill of his estate during that ten-year window by using some of the techniques wealthy U.S. citizens use, such as family limited partnerships

It would have been more difficult getting around the Senate-passed exit tax. Under that system, upon leaving the U.S. expatriates would have had to pay a one-time tax on all unrealized gain, beyond a $600,000 exemption. Here's a planning note: The Treasury Department is required by the new law to report on its effectiveness after its first year. If it looks as if the 2004 law isn't raising the projected $377 million of revenue over ten years, or if Congress is casting about for more cash, the exit tax idea could be revived. So if you plan to become an expatriate, you should pack now.

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