Expatriation

Giving Up U.S. Citizenship: The Real Numbers are Much Higher

Concept art of an article about Giving Up US Citizenship: retired American couple overseas (AI Art)

The Number of Expatriates Has Skyrocketed

Expatriation – deliberately giving up your US citizenship and passport – is admittedly a touchy topic.

What is Expatriation?

Expatriation requires giving up your US citizenship and passport. In the case of a permanent resident, relinquishing your green card. After you expatriate, you must live as a foreigner outside the United States, although you can generally come back for visits.

The number of US citizens expatriating has skyrocketed since Barack Obama took office as president in 2009.

  • In 2008, the number of US citizens expatriating was 231.
  • By 2015, this number had skyrocketed to 4,279 – a staggering 1,752% increase.
  • In the first quarter of 2016, the number of US citizens expatriating was 1,158.

The actual number of US citizens expatriating is likely much higher than the figures provided. We’ll tell you why in a moment.

Giving Up U.S. Citizenship: One Reason is Taxation

The US is one of two countries, and the only major country, that imposes significant income, capital gains, gift, and estate taxes on its non-resident citizens.

Almost everywhere else, your liability to pay income tax ends after a sustained period of non-residence, generally one year or longer. But to permanently end US tax liability, Americans must give up their US citizenship and passport.

The media emphasizes the tax aspect of expatriation when it trains its focus on high-profile expatriates like Facebook co-founder Eduardo Saverin or pop singer Tina Turner. But the vast majority of individuals who give up US citizenship or permanent residence pay at least some tax in their adopted country.

Indeed, the most popular destination countries for US citizens (current or former) moving abroad are Canada and Mexico. Canada has a top federal income tax rate of 33%, and provincial taxes typically add 10% or more to the total. Mexico has a top personal tax rate of 35%. (Learn more about how to move to Mexico here.)

We’ve discovered the motivations for our expatriation clients to take this step are more nuanced than mere tax avoidance. Various non-tax factors make it increasingly difficult for US citizens to live outside the US.

A case in point is the overwhelming compliance burden US taxpayers living overseas face.

The reporting regime they face is complex, overlapping, and constantly evolving. Even minor violations are subject to draconian penalties.

Take for instance the ubiquitous Treasury Form 114 (formerly Form TD F 90-22.1), the “Report of Foreign Bank and Financial Accounts.” Fail to file this form and you could be subject to a civil penalty amounting to the greater of half the balance in your non-US accounts or a fine of $100,000 per account.

True, sanctions are often less severe, but many other mandatory disclosure forms exist. They’re easy to miss, and all have severe penalties for non-compliance. In aggravated circumstances, the IRS can refer a case to the Department of Justice for criminal prosecution.

Don’t forget, too, that if you owe more than $50,000 in taxes or tax-related penalties, the State Department can revoke your passport.

Why Americans Living Abroad Are Giving Up Their US Citizenship

US laws force foreign banks and other financial institutions to enforce US tax and reporting rules with respect to their US clients. If the banks fail to do so, they face a 30% withholding tax on most US source income. In many cases, it’s easier for foreign banks to “fire” US clients than deal with this risk.

Then there are the problems with day-to-day living for US citizens living overseas. Our clients have reported bank account closures and mortgage cancellations, merely due to their US status. Also, Americans living abroad who contribute to a non-US pension or retirement plan must usually pay US tax each year on the increase in value within it. That’s true even if the income is tax-deferred in their adopted country.

The upshot is that many Americans, especially the more than 8 million living abroad, have decided that their US citizenship is more trouble than it’s worth.

Underreporting of Expatriation Numbers

Our firm has helped more than 50 clients expatriate since 2006, but only about half of them have shown up in the Federal Register.

Here’s some other evidence the real numbers are much higher: 

  • To enforce a prohibition against individuals who have renounced citizenship from possessing firearms, the FBI maintains its own database of the names of expatriates. In 2012, it announced that the list had grown by a total of 4,385 names. Yet that same year, the official list contained only 932 names.
  • An article from South Korea states that 2,158 of their citizens gave up US passports or green cards in 2011. In other words, more people from a single country expatriated in 2011 than the 1,781 that appeared on the official list for the entire world for that year.
  • The Swiss news media reported that for the first three quarters of 2012, a total of 411 US citizens expatriated at the US consulate in Berne, Switzerland. If reconciled with the official IRS statistics, this would mean that Switzerland alone accounted for over 40% of the total official expatriations (932) in 2012.

Are You A Good Candidate for Expatriation

To expatriate is a big decision. One that has implications far beyond possibly paying an “exit tax” upon your permanent departure.

Expatriation means, for example, that you no longer have the automatic right to enter or live in the United States. You’ll need to get a visa to do so, unless your non-US passport qualifies you for visa-free entry.

Before making this decision, review several key factors to ensure it’s the right choice for you.

You can find more information here: Are you a good candidate for expatriation?

How to Get a Second Passport: 7 Legal Ways

Thinking about a second passport? There are just seven official (legal) ways to get one. Find out which one is the best option for you: How to get a second passport.

Giving Up U.S. Citizenship: Don’t Believe the Official Statistics

We don’t know why the official expatriation statistics are so low, but based on these reports, we think a more realistic number of individuals expatriating is probably at least 10 times the official figures. That would mean close to 40,000 Americans give up citizenship or long-term residence annually.

Clearly, the decision to turn in your US passport or green card is a big one. It requires that you acquire a second passport, if you don’t already have one. It also requires that you live permanently outside the United States, if you don’t already.

5 Reasons Why Nestmann Clients Are Giving Up Their US Citizenship

Expatriation is a radical step. So why bother?

We count at least five reasons to consider this step. This is especially true if you’re one of the over nine million Americans who live full-time in another country.

1) Duplicate tax obligations. The United States is one of only two countries that impose income tax on its citizens on their worldwide income if they live in another country. Eritrea, a totalitarian dictatorship, is the other one. Complying with US tax rules is hard enough if you’re living in the United States. But if you’re living in another country, you must now file two sets of tax forms each year. In most cases, you can credit the taxes you pay in your adopted country against your US obligations. But this is time-consuming and expensive to file two sets of tax forms each year.

2) Onerous reporting obligations. The first effort by Congress to require companies and individuals to disclose the assets they held internationally was in 1960. Subsequent laws decreed in 1962, 1970, 1976, 1986, 1996, 1997, 1998, 2005, 2010, and 2011 expanded reporting obligations and increased penalties for noncompliance. With each successive enactment, a growing network of uncoordinated reporting obligations and draconian penalties came into existence. The resulting hodgepodge is difficult even for international tax specialists to navigate. And it’s not just tax forms with which you need to be concerned although it’s those forms that are best known. For instance, if you’re enrolled in a non-US retirement plan, the odds are you need to report that plan as a foreign trust. That’s hardly an intuitive conclusion.

What’s more, the penalties for violating these reporting rules are draconian. For instance, failing to properly report a foreign trust can result in the IRS requiring you to fork over 35% of its value – in this case 35% of your foreign retirement assets. Expatriation is the only way to permanently end these reporting obligations and the penalties that accompany them.

3) Inability to maintain financial accounts anywhere in the world. Laws like the infamous Foreign Account Tax Compliance Act (FATCA) have made it difficult for Americans living abroad to carry on the most basic financial and business relationships in their adopted countries. FATCA, for instance, forces foreign financial institutions to follow US tax and reporting rules with respect to their US clients. If these institutions fail to do so, they face a 30% withholding tax on many types of US source income and other capital transfers. In many cases, it’s easier to “fire” US clients than deal with this risk. As a result, Americans living abroad report their financial accounts being closed. We’ve also heard reports of Americans abroad being denied mortgages and even insurance coverage.

What’s more, as part of ongoing “de-risking” strategies, US financial institutions are increasingly closing accounts of Americans living abroad. Thus, they’re finding it difficult to obtain financial services anywhere in the world.

4) Inability to work or conduct business. Another challenge to Americans abroad is getting a job or forming a business. One client’s employer told him he’d be fired unless he gave up US citizenship within 30 days, due to the employer’s correct perception that the client’s position as a company officer would require the client to disclose confidential information about the company to the IRS and Treasury. For the same reason, it’s increasingly difficult for US citizens or permanent residents to enter into business relationships with foreign persons or companies. They (the foreigners) simply view Uncle Sam as an uninvited and unwanted intruder into the relationship.

5) Inability to have a normal retirement. Most countries offer bona-fide residents the opportunity to make tax-advantaged contributions to retirement plans; schemes similar in concept to an IRA or 401(k) in the United States. But with only a few exceptions, the IRS considers the buildup in value in a non-US retirement plan to be taxable. That means retirees pay taxes twice on the same income; once when it’s generated within the plan (by the United States) and a second time when the income is distributed (by the country offering the plan). In high-tax countries like Canada, the effective tax rate in this income can exceed 70%.

Need Help?

We can assist in every phase of giving up your US citizenship or long-term residence. This includes helping you get a second passport before giving up US citizenship.

And if you’re not ready to expatriate, we can help you take advantage of tax breaks in the Tax Code that apply to US citizens and permanent residents living overseas.

Schedule a free no-obligation consultation with a Nestmann Associate to see if expatriation is right for you.

On another note, many clients first get to know us by accessing some of our well-researched courses and reports on important topics that affect you.

Like How to Go Offshore in 2024, for example. It tells the story of John and Kathy, a couple we helped from the heartland of America. You’ll learn how we helped them go offshore and protect their nestegg from ambulance chasers, government fiat and the decline of the US Dollar… and access a whole new world of opportunities not available in the US. Simply click the button below to register for this free program.

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