The United States is sometimes considered the most desirable country in the world. Much like ancient Rome, there has long been certain cachet associated with being an American citizen. However, that could be changing. The tax situation associated with American citizens with foreign income, or income that they keep in anonymous bank accounts, as well as the situation that plagues dual citizens and Americans living abroad, is prompting many to turn in their passports and renounce their citizenship.
In fact, the government reports that more than 1,800 people renounced their citizenship or gave up their green cards in the first six months of 2013. For reference, only 932 gave up their American identity in the entirety of 2012.
Disclosure Requirements and Taxation
One of the big reasons that some Americans are hurrying to give up citizenship has to do with the new disclosure rules coming. In an effort to get a handle on avoidance and capture lost revenue, the Foreign Account Tax Compliance was passed in 2010. Foreign institutions are required to report assets owned by Americans to the government and many, including Swiss banks storied for their secrecy, are coming into compliance.
Americans with overseas assets are also required to file more tax forms, some of which can be a bit of a hassle. The new disclosure requirements ensure that a number of Americans with overseas bank accounts will be required to hire specialists to file the paperwork at an additional cost.
Expats Filing Twice
In some cases, it’s not a matter of hidden bank accounts. For expats living abroad, filing taxes twice for the same income doesn’t make much sense. The United States taxes citizens on their foreign income sources, no matter where it was earned. I remember having my income from Taiwan taxed by the Taiwanese government, and then taxed here in America. While there was a foreign income tax credit to help offset the burden (based on how much I had paid to Taiwan), it was still somewhat disappointing.
Many of those living abroad, or those with dual citizenship, find it difficult and costly to pay taxes on foreign income. After all, if the money isn’t earned in the United States, and you don’t reside in the country, why should America collect taxes on the money? Some expats decide that it makes more sense to simply give up their citizenship.
Giving Up Citizenship Isn’t a Free Pass
Even if you give up your citizenship, though, it’s not a free pass to avoid paying taxes. If you have assets totalling more than $2 million, the United States actually charges you an exit penalty. And giving up your U.S. citizenship could affect your heirs if they retain their citizenship, since the exit tax could be applied to your estate when it passes on to your posterity.
And, of course, there is no statute of limitations when evidence of tax evasion is found. So, it you have been hiding assets in an offshore account in the hopes of avoiding taxes, the government can still come after you for tax evasion, even after you have renounced your citizenship.
Taxes are always a complicated issue. Foreign income, foreign assets, and foreign residency all add to the complexity. However, simply turning in your passport and insisting you are no longer a U.S. citizen might not completely solve your problems.