Expatriation — deliberately giving up your US citizenship and passport — is admittedly a touchy topic.
Congressman Sam Gibbons (D-FL), referring to expatriates, spoke of “the despicable act of renouncing allegiance to the United States.” Neil Abercrombie (D-HI), described expatriates as “Benedict Arnolds who would sell out their citizenship, sell out their country in order to maintain their wealth.”
The ferocity with which US politicians have seized upon this issue has made sanctions against expatriates increasingly more severe. Congress first enacted anti-expatriation tax rules in 1966. The laws were tightened in 1996, 2004, and most recently in 2008.
Then, beginning in 2010, the State Department began charging a fee to expatriate. Originally $450, that fee has now increased to $2,350. Most other countries charge no fee. But the amount Uncle Sam demands for this service is 20 times higher than what other developed nations charge.
But apparently, a lot of (former) US citizens don’t care. Since Barack Obama took office as president in 2009, the number of citizens expatriating has skyrocketed from 231 (in 2008) to 4,279 (in 2015). That’s an increase of 1,752%!
And just two weeks ago, the IRS announced that a whopping 1,158 US citizens gave up their citizenship in the first quarter of 2016.
Incidentally, I think the actual numbers are much higher; I’ll tell you why in a moment. But first, let’s explore the reasons why a US citizen might decide to become, as Congressman Abercrombie puts it, a “Benedict Arnold.” And why you might want to join them.
One reason is taxation. The US is one of two countries, and the only major country, that imposes significant income, capital gains, gift, and estate taxes on its non-resident citizens.
Almost everywhere else, your liability to pay income tax ends after a sustained period of non-residence, generally one year or longer. But to permanently end US tax liability, Americans must give up their US citizenship and passport.
The media emphasizes the tax aspect of expatriation when it trains its focus on high-profile expatriates like Facebook co-founder Eduardo Savarin or pop singer Tina Turner. But the vast majority of individuals who give up US citizenship or permanent residence pay at least some tax in their adopted country.
Indeed, the most popular destination countries for US citizens (current or former) moving abroad are Canada and Mexico. Canada has a top federal income tax rate of 33%, and provincial taxes typically add 10% or more to the total. Mexico has a top personal tax rate of 35%. Do those countries sound like tax havens to you?
I’ve discovered the motivations for our expatriation clients to take this step are more nuanced than mere tax avoidance. Various non-tax factors make it increasingly difficult for US citizens to live outside the US.
A case in point is the overwhelming compliance burden US taxpayers living overseas face. The reporting regime they face is complex, overlapping, and constantly evolving. Even minor violations are subject to draconian penalties. Take for instance the ubiquitous Treasury Form 114 (formerly Form TD F 90-22.1), the “Report of Foreign Bank and Financial Accounts.” Fail to file this form and you could be subject to a civil penalty amounting to the greater of half the balance in your non-US accounts or a fine of $100,000 per account. True, sanctions are often less severe, but many other mandatory disclosure forms exist. They’re easy to miss, and all have severe penalties for non-compliance. In aggravated circumstances, the IRS can refer a case to the Department of Justice for criminal prosecution.
Don’t forget, too, that if you owe more than $50,000 in taxes or tax-related penalties, the State Department can revoke your passport. Take that, you Benedict Arnolds!
What’s more, US laws force foreign banks and other financial institutions to enforce US tax and reporting rules with respect to their US clients. If the banks fail to do so, they face a 30% withholding tax on most US source income. In many cases, it’s easier for foreign banks to “fire” US clients than deal with this risk.
Then there are the problems with day-to-day living for US citizens living overseas. Our clients have reported bank account closures and mortgage cancellations, merely due to their US status. Also, Americans living abroad who contribute to a non-US pension or retirement plan must usually pay US tax each year on the increase in value within it. That’s true even if the income is tax-deferred in their adopted country.
The upshot is that many Americans, especially the more than eight million living abroad, have decided that their US citizenship is more trouble than it’s worth.
But how many Americans actually become “Benedict Arnolds”? Like so many other things, it depends who you ask, but the tally reported in the Federal Register appears to be just the tip of the iceberg. Our firm has helped more than 50 clients expatriate since 2006, but only about half of them have shown up in the Federal Register.
Here’s some other evidence the real numbers are much higher:
- To enforce a prohibition against individuals who have renounced citizenship from possessing firearms, the FBI maintains its own database of the names of expatriates. In 2012, it announced that the list had grown by a total of 4,385 names. Yet that same year, the official list contained only 932 names.
- An article from South Korea states that 2,158 of their citizens gave up US passports or green cards in 2011. In other words, more people from a single country expatriated in 2011 than the 1,781 that appeared on the official list for the entire world for that year.
- The Swiss news media reported that for the first three quarters of 2012, a total of 411 US citizens expatriated at the US consulate in Berne, Switzerland. If reconciled with the official IRS statistics, this would mean that Switzerland alone accounted for over 40% of the total official expatriations (932) in 2012.
I don’t know why the official expatriation statistics are so low, but based on these reports, I think a more realistic number of individuals expatriating is probably at least 10 times the official figures.
That would mean close to 40,000 Americans give up citizenship or long-term residence annually.
Clearly, the decision to turn in your US passport or green card is a big one. It requires that you acquire a second passport, if you don’t already have one. It also requires that you live permanently outside the United States, if you don’t already.
And if Senators Bob Casey (D-PA) and Chuck Schumer (D-NY) have their way, wealthy expatriates would be banned from ever returning to the United States. Congress declined to enact this proposal in 2012 and 2013, but you can count on its reintroduction, no matter who’s elected president this November.
It’s hard to see how someone like Donald Trump, who bashes everything non-US, could oppose this bill. And Hillary Clinton actually supports a proposal that would revoke the citizenship of anyone who “materially supports” terrorism.
No wonder Google recently reported that searches for “how to move to Canada” have spiked 350%.
Second passport, anyone?
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