Renouncing US Tax Obligations Beyond Borders

Record Numbers of US Americans Ditch Passports in 2013

EspañolYou can’t tax us if we are abroad and no longer citizens.

This is the mentality of an increasing group of US Americans who are making the seemingly drastic decision to forgo their citizenship. With income tax burdens for those living outside US territory becoming more onerous, many have chosen the route of having obligations to one less government.

The United States, the only nation in the Organization for Economic Cooperation and Development that taxes citizens independent of where they reside, has always collected income tax on its citizens who live elsewhere; this phenomenon is not new. What is new is Fatca, the latest tax law — slated to take effect in July, 2014. It will require all international financial institutions globally to report directly to the US Internal Revenue Service all assets and incomes of any US citizens with US$50,000 or more on their books.

And with Fatca lies the real reason for the increase in desertions. With deficit reduction the motive behind the law, the US government is putting the patriotic pinch on its own citizens. In return, US Americans are thinking twice about which passport they choose to carry. And the numbers are evident.

Relinquishing Your Citizenship

Expatriates relinquishing their nationality at US embassies surged in the second quarter of 2013 to 1,131, in comparison with 189 for the same period in 2012. By the close of the second quarter, the total was at 1,810 — setting a pace for 2013 to have the highest desertion rate on record.

The benefit of having more than one passport is well documented, and one from the United States has long held high value. Furthermore, giving up one’s citizenship is not a decision to be taken lightly. But with the US government using Fatca to monitor greater aspects of peoples’ lives, citizens are fighting back and taking the plunge in unprecedented numbers.

And it’s not just the wealthy expatriates escaping tax obligations. With the increase in tax reporting — and the increased paperwork and risk of taxpayer misstep that comes with it — ordinary earners are being dragged into an expensive, time-consuming, and bureaucratic nightmare that routinely costs more than $2,000 in annual accounting expenses.

“I don’t know any Americans abroad who aren’t thinking about giving it up,” says Victoria Ferauge, who currently lives in France. Another US American with similar sentiments, who didn’t release her name, told the BBC, “In the end, I sleep better now knowing that I no longer have to worry about the U.S. requirements. I will never be able to live or own property in the U.S. but I can visit and that’s enough for me.”

Relinquishing your citizenship doesn’t come free, either. The US government charges many citizens wanting to give up their citizenship with an “exit tax” for the privilege of leaving.

The exit tax applies to those classified as “covered expatriates.” To qualify for this status there are three criterion: to have been paying high US federal taxes previously, to have a net worth of $2 million or higher, or be someone who is unable to certify, under oath, that he has been in complete compliance with all US tax regulations for the five years immediately preceding expatriating.

The vague criterion for the third option opens the door for creative interpretation as to who ultimately constitutes a “covered expatriate.” And the cost doesn’t end there.

As immigration lawyer Eugene Chow also points out, assets, both domestic and international, are also taxed at a rate of 15 percent — an appreciation rate for capital gains regardless of whether the assets have been sold.

US citizens aren’t the only ones fighting back against the law. Financial institutions too find themselves targets and, with their push back, many US citizens are stuck in no man’s land in terms of banking.

With the IRS mandating the reporting of financial assets of US clients, institutions are taking a thanks-but-no-thanks approach. Banks, in addition to hefty fines, could also be subject to withholding of 30 percent on their clients’ US-sourced income streams if they fail to comply.

“The IRS is essentially outsourcing its compliance rules to non-American related companies . . . [Foreign companies] are just saying to Americans ‘we don’t want your business,’” says Chow.

Overlooked is that this is ultimately another act on the part of the United States to lower its deficit. Rather than consider new ways to curb its own spending, laws like Fatca — despite its minority elitist target — force ordinary citizens to jump through hoops simply to accomplish day-to-day actions.

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8 comments
expat CPA
expat CPA

Hi Andrew,

The key reason people, primarily in Canada are renouncing are the simple costs of filing. Our taxes here are high enough, but it's the filing requirements. It's rare that I prepare a return for less than $1000, and that is for a simple one. I'm not with a big firm, I work on my own. Big firms charge 4-5000 for what I will do for 1-2000.


It's the little things that add up. If someone decides to save for college education for their kids, they've now started a foreign trust, which reporting on is very complex. IF someone has a government registered tax free account, another foreign trust. If you invest in a normal mutual fund, somehow the US government has decided you are trying to cheat them and impose PFIC rules, (very complex) that I will have to deal with. These ordinary things can end up adding thousands to the cost of a return annually.


As a result, I'm not surprised by this. I help people get compliant, often doing 5 years of returns and then referring them to immigration attorneys to ensure the renouncing is done properly. It's a sad system here, and the American government ought to be ashamed of itself. However, we all know they just think of anyone abroad as money to be stolen.

Andrew Woodbury
Andrew Woodbury

Hi SophieMichael, thanks so much for commenting. 

You're right, this is clearly a much bigger issue for U.S. citizens living abroad. With this said, though, that number is currently over 6 million people, so it certainly affects many. 

There are, as you mention, many details to consider when making this decision - which can include actually still being taxable by the U.S. government for a certain amount of years after renouncing. Even with the many benefits that accompany a U.S. passport many are deciding to go forward with the process, which is very telling. 

M Sophie
M Sophie

I think renouncing US Citizenship is mainly because they are living in another country and US tax and disclosure policies, and laws such as FATCA, are rendering it extremely expensive and burdensome to keep that US passport but I believe renouncing your U.S. citizenship is a decision that comes with a number of variables that must be vigilantly considered before jumping into the pool as Former U.S. citizens also face difficulty in even coming back into the United States for visits.

bubblebustin
bubblebustin

Should the renunciations remain consistent with the Federal Register's last report, the US is on track to having its citizens renouncing at 4 times the rate of Canada's - and that's taking into consideration that the US has 9X the population of Canada's. Perhaps "Land of the Flee" is more apt. 

Andrew Woodbury
Andrew Woodbury

@bubblebustin I actually did come across this yesterday. It's certainly telling. It echos a lot of sentiments of non-U.S. citizens around the world as the result of FATCA. Just because someone isn't a 'U.S. person' doesn't mean they won't be affected. 

Canada obviously has a closer connection to the U.S. than other countries. It will be interesting to monitor the effects it has on Canadians. Thanks for the share - this may warrant a follow-up piece.