More American citizens gave up their citizenship in the second quarter of 2013 than in all of 2012. That should get someone’s attention. In quarter two of this year, 1,130 citizens threw in the towel, in addition to 679 in quarter one.
What’s Driving the Increase?
Capital gains tax rose to 20% max, and the top marginal income tax rate is now 39.6%. And soon the tougher enforcement of the Foreign Account Tax Compliance Act (FATCA) will kick in. A lot of folks are saying that it’s just not worth it anymore to retain citizenship.
Beginning in mid-2014, foreign banks and other financial institutions – in countries which have agreed to comply – will be expected to provide the IRS with details of assets held by Americans and businesses with American ownership. Those institutions will also have to withhold income tax on income in those accounts.
How does the IRS wield power over foreign institutions? Essentially they have no power, but they can assess a 30% withholding tax on payments from the U.S. to those banks which fail to cooperate. For that reason, many countries have relented.
As of July 15, 2013 the countries listed below have agreed to comply with FATCA’s demands, and the U.S. Treasury continues to negotiate with many others.
- The United Kingdom
According to the Treasury Department, countries are lining up, eager to sign. They say there is an “overwhelming interest from countries around the world.” And because of this, compliance with FATCA reporting has been pushed back to June 30, 2014 (it was supposed to begin on January 1, 2014). This means the first reports will be due in 2015 on accounts held in 2014. .
The objective of FATCA is to identify those who might be evading taxes using offshore investment vehicles. With U.S. taxes so high, some expatriates see it as a no-brainer to switch teams
Taxes are not the only motivating factor. For some it isn’t about money at all. It’s the onslaught of redtape. Businessinsider.com quotes one investment banker as saying “”My decision was less about the actual amount of taxes I had to pay, and more about the system. I’m not an ultrawealthy dude. It was the hassle with all the paperwork.” Like many others, this former U.S. citizen is now a citizen of Hong Kong where the top tax rate is 15%.
Is FATCA a big money maker? Not really. Some analysts say FATCA enforcement will bring in maybe $7.6 billion over the next decade. Spread over an estimated six million expatriates, that’s about $170 in added revenue per year, said Business Insider.
What’s the Lesson?
Grasping for every last tax dollar doesn’t always pay, and maybe our Treasury resources could be better spent. The added paperwork burden on businesses and individuals, the strained relations with other countries, and the alienation of Americans may be too high a price. FATCA could be one big fat mistake.