Ordinary American Expatriates: Carol’s Story
Not everyone who expatriates (gives up their US citizenship and passport) fits the stereotype of being wealthy.
Take Carol, a Canadian citizen who emigrated to Canada with her husband in 1969.
She obtained Canadian citizenship and later had a disabled son, who automatically became a US citizen because his parents were US citizens. Her son benefits from a Registered Disability Savings Plan (RDSP), which Carol and her husband contribute to, with the Canadian government matching contributions up to C$3,500 per year.
Carol thought she’d automatically renounced her US citizenship when she became Canadian, unaware that her son’s US citizenship status could complicate things. The US imposes taxes on its citizens regardless of where they live. The IRS considers the matching grants to her son’s RDSP as taxable income, and Carol is required to file a form declaring the RDSP as a “foreign trust.” Failure to file this form results in severe penalties.
Obama’s Proposal for Reform
Obama’s 2016 budget proposal offers some relief, allowing certain individuals who were dual citizens at birth to expatriate more easily.
Under current law, wealthy “covered expatriates” are subject to an “exit tax.” But dual citizens at birth can avoid this if they meet specific criteria, such as being a tax resident of another country and having limited residency in the US.
If not “covered expatriates” or if they meet these criteria, they can avoid the exit tax but still need to certify compliance with US tax obligations for the preceding five years. This is problematic for people like Carol and her family, who face taxes and interest on the “income” from their RDSP.
While Obama’s proposal to eliminate this certification for some dual citizens is a step in the right direction, it doesn’t help most of the 7 million US citizens living abroad. But it could benefit several hundred thousand people.
The Motivation Behind Obama’s Proposal
The motivation behind Obama’s proposal might not be entirely altruistic.
The Foreign Account Tax Compliance Act (FATCA) makes it difficult for Americans abroad to manage their financial affairs, and Obama’s focus on making FATCA successful aligns with his campaign promise to combat “offshore tax havens.”
There are legal challenges to FATCA, such as a lawsuit in Canada filed by two US-Canadian dual citizens, arguing that the agreement between the US and Canada discriminates against them. If successful, this lawsuit could undermine FATCA globally. But Obama’s proposal could weaken these legal arguments.
Despite the proposal’s potential benefits, its enactment is uncertain. Congressional opposition, especially from figures like Schumer, and political reluctance make it unlikely. While Obama could theoretically authorize the Treasury Department to implement the change through an executive order, it’s doubtful he would expend the necessary political capital.
Historical Significance
Still, Obama’s proposal marks a significant moment.
It’s the first time since the income tax’s introduction in 1913 that a president has suggested modifying citizenship-based taxation.
Though it may not succeed, it could be seen as the beginning of the end for this outdated system.
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.
Need Help?
Since 1984, we’ve helped more than 15,000 customers and clients protect their wealth using proven, low-risk domestic and offshore planning. To see if our planning is right for you, please book in a free no-obligation call with one of our Associates. You can do that here.
We can also 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 your US citizenship.
