Why Have So Many Americans Considered Expatriation? It’s Probably Not What You Think…

I know we've covered this topic a fair bit recently, but I just had to share these new stats with you.

According to a recent poll by research firm Rasmussen Reports, fully 9% of the U.S. population has considered "expatriation."

These are truly shocking numbers—nearly one in ten Americans thinking about giving up their birthright.

Of course, some of this is just "talk." People always complain about what bothers them. But with endless squabbling in Washington, more and more intrusions into our private lives, and massive unemployment and underemployment (especially among young people), a growing number of Americans are ready to say "good riddance".

Indeed, a record number of Americans "officially" expatriated in the second quarter of 2013—and the real number is probably much higher.

The mainstream media says that U.S. citizens give up their citizenship only to avoid paying tax. The hoopla last year over the expatriation of Facebook co-founder Eduardo Saverin was a perfect example.

Bloomberg News, for instance, claimed that he saved at least $67 million in federal income taxes by bidding adieu to the red, white, and blue. Just about every newspaper in the USA picked up that figure.

Only, it's not true. When Saverin expatriated, he had to pay an “exit tax” on the pre-IPO value of his Facebook stock. Since it cost him next-to-nothing to acquire his original interest in the company, every dollar of gain was subject to the exit tax (less a $651,000 exclusion). Based on the pre-IPO value of that stock, I'd wager Saverin paid an exit tax of more than $350 million. And that just includes his Facebook shares—nothing else.

Sure, he won't have to pay U.S. taxes going forward on his non-U.S. income. But he certainly didn't save $67 million off the bat.

So, while the media sound bytes tell you that expatriation is all about tax, don't believe it. Sure, that's a part of it, but the reality is much more complex.

My own experience with expatriated clients backs this up.

  • One who had lived in Switzerland for more than 40 years gave up her U.S. citizenship only after all of the banks she dealt with there closed her accounts. They didn't want to deal with all the reporting requirements the USA requires if they accept U.S. account-holders. It's easier just to fire their American customers.
  • Another client received a letter from the bank that had issued a mortgage years earlier for her home in Germany. The letter threatened to cancel her mortgage unless she could prove she was no longer a U.S. citizen. Rather than face a huge balloon payment, she gave up her passport.
  • A Canadian client contacted me after receiving a bill from the IRS for $20,000, despite being (he thought) 100% compliant with all U.S. tax and reporting obligations. He’d even hired a big-name U.S. accounting firm to prepare his tax returns each year, at a cost of more than $5,000 annually. He never owed any U.S. tax because taxes in Canada are higher than in the USA, but he still got screwed. It appears a Canadian educational savings plan account he'd set up for his daughter was the problem. Under Canadian law, gains in the account are tax-deferred—but not under U.S. law. That led to a big tax bill—and his decision to expatriate.

The fact is, more than 7 million Americans now live abroad. Many of them can no longer hold bank accounts, qualify for a mortgage, or set up a tax-deferred account for retirement or their children's education.

They don't leave solely because of taxes—they give up their native son and daughter status because they pretty much have to just to function outside this country.

Americans living in the USA, of course, are largely shielded from these harsh consequences. They can set up U.S. bank accounts, obtain a U.S. mortgage, and set up U.S. tax-deferred accounts to fund their retirement or their children's education.

It's when they venture offshore that their problems begin. They'll find the vast majority of international banks won’t deal with them. Often their inquiries are ignored completely.

It's no wonder. One banker I met with a few months ago in Zurich told me that his bank didn't even respond to U.S. inquiries. It had decided that even an email or telephone response saying the bank couldn't accept U.S. business risked getting caught up in Uncle Sam's laws and regulations.

In other words, your birthright as an American makes you "guilty until proven innocent" in the international financial world. There are solutions available, but they're more expensive, less convenient, and require "full disclosure" to the IRS.

Now, to be clear, I'm not saying that unless you give up your passport, there's no point in going offshore. If anything, the strategies my colleagues and I talk and write about are more important now than ever.

In the face of a government that seems hell bent on confiscating any wealth we have through taxes, inflation, or downright theft through the legal system, getting "ass and assets" outside the system—even if more complicated than in previous times—is still the only tried and true way to effectively protect ourselves.

Mark Nestmann

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