November 29, 2013



With droves of people leaving their homes and families and sometimes risking life and limb to come to the United States with the dream of becoming a citizen, it is ironic that record numbers of Americans are voluntarily giving up their citizenship.

This includes celebrities such as Tina Turner, who formally filed the paperwork to relinquish her U.S. passport at the end of October. Tina Turner obtained a full Swiss passport in April of this year and lives in Zurich with her husband Erwin Bach, a German national.

Of the estimated 6 million American expatriates around the world, 932 renounced their U.S. passport in 2012. As of the second quarter of 2013, 1,800 expats have already turned in their passports, according to official statistics provided by the IRS. These statistics do not count the thousands of long-term residents who have given up their green cards. If the trend continues, the number of Americans giving up their citizenship will have quadrupled in a single year. Why the sudden rise? In a word, taxes.

United States and Eritrea: Tax Policy Buddies

In the whole wide world, only two countries require their citizens and long-term residents to pay taxes on their worldwide income and assets, the United States and Eritrea. Although the requirement for expats to file tax returns and disclose foreign accounts to the IRS is nothing new, a new law called the Foreign Account Tax Compliance Act, which will take effect next year, is making many expatriates nervous. FATCA gives the IRS additional powers that allow it to look into the bank accounts of expats. This means many Americans living abroad will need to more rigorous with their tax filing or risk large fines.

Tax Evasion or Hassle Evasion

Although for some wealthy expats, such as Tina Turner — who has an estimated net worth of $200 million and resides in a country with particularly low taxes — will save money by renouncing their citizenship, the increase in people renouncing their nationality is not only due to higher taxes. In most cases, expats pay taxes in the countries they live and, because of IRS double taxation deductions, are not at risk of paying additional taxes. This is either because they pay higher taxes in their country of residence or do not make enough money to have to worry about it. For many expatriates, the main reason is that they do not want to be dragged into an expensive and time-consuming red tape quagmire.

FATCA

Some expats already spend hundreds or even thousands of dollars in accountant fees, to satisfy their American tax filing duties. According to an estimate by the BBC, the new law has increased the cost of simply filing taxes from $2,000 to $5,000, even when they don’t actually owe any taxes to the IRS. Some U.S. citizens are sick and tired of the growing paperwork expats must endure, but it’s not only individuals who have grown weary of IRS tax forms.

The new FATCA law imposes onerous reporting requirements on banks and financial institutions that do business with American nationals. Banks are required to follow the U.S. Tax Code, identify and audit accounts with more than $50,000 and either report them to the U.S. Treasury or withhold 30% of the dividends and interest generated by these accounts and send it to the IRS. This has caused many small- to mid-sized banks to drop U.S. expats altogether, which makes it harder for them to bank in many regions.

Bye, Bye America Passports

Many U.S. citizens and green-card holders have decided the inconvenience and “cost” of owning a U.S. passport is just not worth it anymore. However, this does not mean those renouncing their passport get a free pass with the IRS. They still have to pay taxes on their assets up to the date their citizenship is cancelled, as well as any taxes they still owe from previous years. It doesn’t mean that their assets couldn’t be tax liable in the future either; U.S. citizens still have to pay taxes on the assets they inherit from foreign nationals.

Photo: Wikipedia