20 March 2018
Being an American abroad can be difficult. Besides being subject to worldwide taxation regardless of residence, US citizens abroad find themselves facing onerous and often confusing obligations for disclosure.
In a further attempt to curb offshore tax evasion, Congress enacted the Foreign Account Tax Compliance Act (Fatca) in 2010, which has resulted in additional disclosure requirements for US citizens abroad. It will also mean substantial compliance obligations for non-US institutions worldwide.
As a result of these burdensome tax and compliance requirements and increased penalties for non-compliance, there has been a dramatic surge in US citizens relinquishing their citizenship. Numbers have risen from about 230 in 2008 to more than 1,800 in the first half of 2013 alone.
While the decision to give up citizenship can be an emotional one, many Americans living abroad for years (in some cases most of their lives) have integrated into their local communities and are comfortable with the notion of no longer being a US citizen.
Some Americans are concerned that they could be labelled “tax cheats” or “unpatriotic” for turning in their US passport – particularly in light of the media coverage and Congressional reaction to Eduardo Saverin’s decision to relinquish his US citizenship before the Facebook IPO.
In reality, specific US federal tax rules have been in place since 1996 to dissuade US citizens from giving up their citizenship for tax purposes, and Saverin almost certainly paid millions in US taxes under these rules as a result of his decision to give up his passport.
These rules are complex and can potentially subject US citizens or long-term green card holders who relinquish US status to a series of tax payments. These include an “exit tax” that can trigger income taxes as if the individual sold all of his or her assets as of the day before relinquishing US status; and a “gift or bequest tax” levied on US citizens who receive gifts or bequests from the individual that is currently equal to 40 per cent of the value of the property transferred.
Fortunately, these rules do not apply to all expatriates. Rather, they apply only to US citizens or long-term green card holders who relinquish their citizenship or green card and meet certain net worth or tax liability tests (or cannot certify tax compliance for the past five years). Even for individuals who meet one of these tests, multiple exceptions apply.
In addition, there are a number of planning techniques that can be undertaken that could substantially reduce the impact of these rules. For example, one straightforward technique considered by Americans looking to give up their citizenship is to gift assets before their expatriation date in an attempt to either reduce their net worth below the threshold that would trigger tax payments or otherwise remove appreciated assets from the exit tax regime.
As US citizens can generally make up to US$5.25 million in gifts tax free during their lifetimes, making gifts before relinquishing US status can, in certain circumstance, yield significant tax benefits.
However, it is important to note that many of these planning techniques must be implemented before an individual relinquishes his or her passport (or green card) to be effective. So it would be wise to speak with a US tax adviser to help navigate the complex tax rules and to determine if there is planning that should be undertaken before an appointment is made with the US Consulate or Embassy.
The article was originally published in South China Morning Post on 26 November 2013.