“Americans living abroad are reconsidering whether their US citizenship is worth the annual administrative burden and tax costs”
Each quarter, the United States publishes a list of the names of each individual who have given up their United States citizenship.This list includes certain long-term residents who are treated as if they were citizens of the United States who lost citizenship. It serves as a barometer of trends in global residency.
This month we learned that in calendar year 2014 over 3,400 individuals gave up their US citizenship or green cards (collectively sometimes called their US nationality), based on a list published by the US Treasury Department in its Federal Register (available atfederalregister.gov/a/2015-02850). Compare this to calendar year 2013, when almost 3,000 individuals chose to formally give up their US nationality, which, at that time, was considered a record breaking year.
While these numbers are small as compared to the overall population on the United States as a whole, the rate of expatriation has been steadily increasing over the last number of years. One can only speculate as to why any of these over 3,400 individuals chose to leave the United States, but some banking and tax rules may be influential.
“Americans living abroad are reconsidering whether their US citizenship is worth the annual administrative burden and tax costs,” says Shannon Retzke, a partner of Withers Bergman LLP. “Banks are refusing to allow Americans to open accounts and are forcing Americans out of their financial institution. Tax compliant Americans abroad are finding it hard to do business. This is one of the major factors driving Americans to expatriate.”
Worldwide Taxation, Tough Asset Disclosure Rules
The United States taxes its citizens on their worldwide income regardless of where they reside. Further, Americans with foreign assets must report their financial assets each year and US citizens who live abroad are likely to have such assets. Those who fail to report face criminal penalties and a host of draconian civil penalties. Click here to read more about these issues and how to resolve them through voluntary disclosure.
A second driver that may be increasing the number of Americans expatriating may be the tone of the Voluntary Disclosure Process or the Streamlined Program. Americans who have ‘come clean’ though the program have been identified as criminals, even if they were fully tax compliant in their country of residence. “We have seen an increase in the number of individuals who make the decision to expatriate in the past 18 months, primarily motivated by a frustration with how they are being treated by the government,” notes Attorney Retzke.
Planning Makes all the Difference
The current US expatriation tax regime applies to citizens and long-term permanent residents that relinquish their US citizenship or US green card (if they have held their green card for at least eight out of the last fifteen years) and fall within the definition of a “covered expatriate” after June 17th 2008. An individual is regarded as a “covered expatriate” if such person: (i) has a net worth of US $2,000,000 or more; (ii) has an average US income tax liability for the five-year period prior to expatriation of greater than US $157,000 (as adjusted for 2014 and updated from time to time for inflation); or (iii) fails to certify under penalty of perjury that he or she has complied with US tax requirements for the five preceding tax years.
A covered expatriate is subject to a so-called “mark-to-market” or “exit” tax which applies to the net unrealized gain on the expatriate’s worldwide assets as if such property were sold for its fair market value on the day before the expatriation date. Any net gain on the deemed sale in excess of US $680,000 (as adjusted for 2014 and updated from time to time for inflation) is taxable at the US capital gains tax rate. While it may be possible to defer payment on the deemed sale and mark-to-market of some assets by making a deferral election, IRS guidance on this election illustrates that this is a complicated and potentially cumbersome election process. Covered expatriates must also pay exit tax on certain pension and deferred compensation entitlements. Click here to read more about expatriation.
The “exit tax” on high net worth and high-income taxpayers can make it prohibitive for certain individuals to expatriate. Aaron Schumacher, a partner of Withers Bergman LLP, notes that “with proper planning and structuring, often this tax can be mitigated or avoided altogether. Even simple pre-expatriation gifting can make a seven figure difference in taxes due.”