Recent pressure by the IRS on both international banks and their U.S. citizen account holders, to bring in previously undeclared tax revenue, has been successful to the tune of well over five billion dollars thus far.
While positive in terms of Treasury revenue, these actions have also brought unintended consequences, one of which is that last year alone more than 3’000 U.S. citizens renounced their citizenship (up 221% between 2012 and 2013). And it’s not just well-off personalities such as Tina Turner, who has lived in Switzerland since 1995, or Facebook co-founder Eduardo Saverin who left to Singapore before his company’s IPO.
There are many reasons in addition to taxation for taking such drastic measures, but, in all cases, it is a step that needs to be carefully considered.
Some of the reasons for a renouncement that we have heard from our clients are:
- The yearly hassle, complexity and cost of filing
- The potential for double taxation, such as upon death (many countries have tax treaties that exclude the first almost $100’000 from double-taxation while filing is nevertheless still required)
- The idea that the U.S. has their nose in personal financials even for a citizen who has not have resided there for 20 years or more
- The indignation that FATCA infringes on one’s privacy rights, which can feel like bullying
- The knowledge that a person may not have a desire or motivation to ever move (back) to the U.S., so the yearly hassle is not worth it
- In the case of the more than one million Canadian double citizens (as just one example), the fact that Canadian financial investments and their benefits such as TFSA and registered education plans for children may have to be avoided
- The sense that neither the U.S. government nor the IRS really understand or much care about its citizens living abroad and seems to punish them unfairly for doing so
- The sense that one has no desire to ever live in the U.S. since owning other citizenship(s) and residing in the respective countries has suited the individual as well or better and offers benefits we don’t have in the U.S. (free education and healthcare for one)
- Plus less consequential issues such as being able to freely vacation in Cuba or
- When traveling abroad (for citizens of more than one country), not even using one’s U.S. passport, because citizens of countries such as Canada or Switzerland are generally better liked than Americans
While the spike in citizenship renunciations in the past two years is likely caused by FATCA-related tax issues, many other factors play into the decisions, such as family history and ties, discrimination and multi-cultural issues, or other strongly emotional factors of fear, anger, disappointment and frustration as cited in this broad article on the issue in the Canadian National Post.
When weighing the pros and cons, there are of course considerable arguments on the other side to consider. Some of the reasons cited for not renouncing might be:
- Perhaps my children would want to work or move to the U.S., and my renouncing might jeopardize their U.S. citizenship
- The fear of reprisal in some way, like not being allowed into the country to visit parents and siblings who still reside there, or being on some sort of list or radar of the U.S. government
- Being born in the U.S., citizenship is my birthright. Giving it up feels like I would lose my most “legitimate” citizenship. Although I have no reason to believe that my (Canadian or other second) citizenship would ever be in jeopardy, it’s more of a psychological thing.
- The State Department renunciation fee, which is now set at $2,350
- A possible “exit tax”: after a threshold of two million dollars in assets in 2014, leaving the U.S. mandates an exit tax. Its rate is currently set at 15%, but could be raised to 30% if senators Chuck Schumer and Bob Casey have their way.
Expats of course consider such arguments carefully when pondering their citizenship and its value abroad, but should also look into tax and estate planning issues that may have far-reaching consequences for the future generation.
About Five Stone Tax Advisers
Five Stone Tax Advisers has years of experience negotiating directly with the IRS to get the best possible outcome for you. Our International Tax Advisory and Compliance unit has a team of tax attorneys, certified public accountants and enrolled agents that form a single sourced point of contact that will provide services for all the legal, compliance and financial reconstruction aspects of offshore account cases.