Copyright John T. Reed 2014
Renouncing U.S. citizenship seems to be growing at least as a media story if nothing else.
A record number of American residents renounced their U.S. citizenship or long-term residence permits in 2013—more than triple the number from 2012. Even more in 2014 and 2015.
However, look at the raw numbers: 932 in 2012 and 2,999 in 2013. The population of the U.S. is 317 million. I do not know if that includes non-citizens with long-term residence permits. 2,999 is 2,999 ÷ 317,000,000 = .000009 or .0009%.
A more honest statement would be that insignificant numbers of Americans renounced their citizenship in the last two years, as always.
Even though we are a “Nation of Immigrants” whose ancestors, implicitly or explicitly renounced their prior citizenship in the old country, Americans are extremely reluctant to renounce their American citizenship. America was supposed to be the end of the line—as far west as you could get from the old country. And as far north as you could go without going into the cold country.
Also, please note that some of those renouncing their U.S. citizenship—most notably Facebook billionaire Eduardo Saverin—were dual or triple citizens when they renounced. Saverin was originally a citizen of Brazil, then he became a citizen of the U.S., then a citizen of Singapore. He only renounced his relatively recent U.S. citizenship.
Also, Saverin had monstrously large incentive. He made billions on his Facebook stock. Singapore has no capital gains tax. The U.S. has a 20% capital gains tax. Brazil, like all countries but the U.S. and Eritrea, does not tax citizens on income they made while living abroad. Saverin also has monstrously large opportunities to live wherever he wants because of his immense wealth.
Two other reasons given for renouncing are the FBAR/IRS Form 8938 and FATCA laws. An informal survey by Tax Analysts says FBAR/FATCA/Form 8938 are the main reason for renouncing U.S. citizenship. You can get around those rather cheaply by holding your foreign financial assets in the form of cash in safe deposit boxes rather than financial accounts. An IRS FAQ says you do not have to report foreign cash you own.
http://www.irs.gov/businesses/corporations/article/0,,id=255061,00.html is an IRS web page titled “Basic Questions and Answers on Form 8938 (posted 2-29-12).” #4 says,
4. I directly hold foreign currency (that is, the currency isn't in a financial account). Do I need to report this on Form 8938?
Foreign currency is not a specified foreign financial asset and is not reportable on Form 8938.
Individual bonds, notes and stock certificates are not considered as “financial accounts.” - See more at: http://sherayzenlaw.com/fbar-definition-of-foreign-financial-accounts/#sthash.8LFslaFD.dpuf.
You can also avoid FBAR reporting by not having $10,000 or more in the aggregate worldwide in all your foreign financial accounts. Alternatively, if you have more than $10,000 but not $50,000 or more you have to file FBAR but you can at least avoid filing IRS Form 8938.
The amounts are not the only issue. By having an account at all, you get to also have a safe deposit box. Getting a box when you have no account is likely to be hard or impossible. You can also get a checking account, debit card, credit card, and access to other services at the foreign bank. Generally, my experience has been that you can get all of those at less than $10,000 total worldwide. I file FBAR and Form 8938, but what I am saying here is I encountered no minimums except a $5,000 CAD minimum for a particular ability to pay US bills by phone. Even that would not have required me to have more than $9,999 total in my five foreign bank accounts.
Penalties for failing to file FBAR and Form 8938 reports are so severe I expect they are unconstitutional. And remember, you owe no tax for having the accounts, the penalties are merely for not telling the U.S. government about them. You may have to pay U.S. tax on the interest you earn in foreign financial accounts. You typically have to report it then deduct your foreign tax credit.
I am the author of the book Aggressive Tax Avoidance for Real Estate Investors, 19th edition. One of the categories of techniques I recommend in that book is accelerating or delaying a taxable event to a more advantageous date if the costs of doing so do not exceed the tax savings.
Renouncers have to pay an exit tax if:
• the average annual income over the past five years exceeded $155,000 in 2013 (the amount adjusts each year for inflation)—so leave early or later if your moving average will be below $155,000 by doing so.
• your net worth is greater than $2 million—time it so that your net worth is less than $2 million if you can
• you don’t certify that you have complied with all U.S. tax obligations in the last five years—so certify it
Also, with regard to timing your renunciation, you have to calculate your capital gains taxes using the fair market value of your assets as of the day before you renounce. You can choose to defer the tax until you sell the asset in question or until you die. To defer, you have to post a bond that guarantees you will pay the tax and you have to pay interest to the IRS for the delay. I expect you could get the bond by pledging the asset as security.
And furthermore, it is a bit like the inheritance tax. There is no exit tax if your capital gains are less than $663,000 (in 2013, the amount is indexed for inflation). And it does not apply to deferred compensation or IRA/401(k) type retirement accounts.
Roughly speaking, if you are getting ready to renounce, and have a bad year financially, you might save tax money by accelerating your renunciation. Conversely, if you have an unusually good year financially, you may be better off choosing to wait until your numbers fall below one of the thresholds or to sell in a year when you have losses that offset part or all of your otherwise taxable gains.
The First Law of Wing Walking applies. Don’t let go of one thing until you have hold of another. Get citizenship in another country before you renounce your U.S. citizenship. And be advised that takes a long time and/or is hard and/or costs a lot of money. As one guy put it an FreedomFest 2013, there is difficulty, cost, and time. You can get two of the three to be decent, but never all three.
Also, I would urge you to live in the country you want to move to for years before you take the step of renouncing. Do NOT decide to renounce your U.S. citizenship in a fit of anger over the latest Hannity Show. Very likely, you are trading the devil you know for the devil you don’t or jumping out of the frying pan into the fire.
My wife lived overseas as the child of an expat oil company accountant then USAID accountant from when she was born in Indonesia for eight years then in Taiwan then in Ethiopia. People like her and her parents know what they are talking about when they speak of living overseas. My wife could not wait to come back to the U.S. for college and never wants to live overseas again. That is not the final word. And she did live in Ethiopia, not Paris or Geneva.
I have read a few books about Americans moving abroad. They generally report that many things that Americans take for granted are surprisingly absent in other countries, even ones you would expect to be like America. For example, even the so-called English-speaking countries all speak a version of English that is not the same as American English to the extent that it causes actual problems, not just funny little stories. You apparently have to speak very slowly in English there to be understood and to use only the most basic words—no references to U.S. culture like football or famous U.S. TV shows.
One book by Kathleen Peddicord said "Mañana (Is Soon Enough for Me)," late-slob behavior is more the rule everywhere outside of North America than just limited to Latin America. She experienced it in Ireland, too.
Prices are much higher for most things including things from America. I found McDonalds to be almost the same as in the U.S. in Australia and New Zealand, but more expensive. My hosts said, “It is an import luxury store here, like a store that sells products imported from Australia or New Zealand in America.”
Peddicord says wherever she lives—Ireland, Paris, and Panama so far—she always has to specially import a washer and dryer from the U.S. because all other countries (possible exception of Canada) use unacceptably tiny washers and dryers. In many countries, the behavior of drivers on the roads is so reckless and outrageous that Americans simply cannot drive there. The movie The Best Exotic Marigold Hotel showed a number of British retirees jumping right into the mooter scooter rides through a demolition derby that is Mumbai. I don’t believe it.
On the other hand, never say never. Many died in Europe in the 1930s and 1940s because they did NOT try to leave their country until too late. The same has been true for many in Asia and Latin America.
I understand TV is impossibly bad even in places like the U.K., Australia, and New Zealand. American expats there say to get an Apple TV and watch U.S. TV on the Net. If you move to a country where they speak another language, Peddicord says you need to immediately take an immersion course in the local language else you will be a sort of shut-in.
Things that are routine in the U.S. like opening a bank account, getting utilities turned on, renting a place to live, and getting a drivers license, can be Kafkaesque abroad, even in countries you always assumed were US-like.
Except for the Northwest and really bad days outside of California and Hawaii, the U.S. has a pretty nice climate. Abroad, you often find hellish heat-humidity or literally clinically depressing permanent gloom, e.g. British Isles. New Zealand has essentially no limited-access highways, e.g. our Interstates.
I lived abroad for just one year. True, it was Vietnam and they were trying to kill us. But I think our favorite songs there—“I’m leaving on a jet plane” and “We gotta get out of this place”—would still have been our favorite songs if the country had been at peace. I remember nothing at all about it being the slightest bit attractive. The whole deal reminded me of the dump we used to have to take our trash to weekly when we lived in rural Delaware.
So if you are considering renouncing your citizenship, do it very slowly and spend most of the time you are considering it and working on it abroad trying out your new life.
Also, I think you may be better off just leaving the U.S. without renouncing. That way you leave open the option of returning. If you fail to pay taxes and such while away, you would need to talk to a U.S. lawyer before coming back. Whether you would have to pay taxes upon your return would depend on whether there was an amnesty at the time (they have been frequent), whether you were solvent when you returned, the value of your assets in the U.S. and elsewhere, whether or not you needed your U.S. passport to escape from a foreign war or other violent emergency. I see no great advantage to renouncing and many disadvantages to it. Play it by ear and do it slowly.
John T. Reed