Are You a Good Candidate for Expatriation?

by Mark Nestmann The Nestmann Group, Ltd.

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Over the last few years, I’ve helped dozens of U.S. citizens and permanent residents (“green card” holders) give up their U.S. nationality or residence status. This is called Expatriation.

It’s a big decision – one that has implications far beyond possibly paying an “exit tax” upon your permanent departure.

Some of the considerations you need to review include:

  • Will you be able to return to the United States to visit relatives, receive medical treatment, etc.?
  • Does the passport you’re using in place of a U.S. passport provide sufficient visa-free travel options for the countries you wish to visit regularly?
  • Do you have a non-U.S. home where you can not only live comfortably, but also become integrated with the local community?
  • Do you have U.S. assets or sources of income that would actually be subject to higher tax if you expatriate?
  • How will your U.S. pension and social security income be taxed after expatriation?

For those of you not familiar with the concept of “expatriation,” perhaps I’m getting ahead of myself. Why might you wish to take the admittedly radical step?

One reason is taxation. The United States is one of two countries, and is the only major country, that imposes significant income, capital gains, gift, and estate taxes on its non-resident citizens and permanent residents.

In virtually all other countries, individuals end their liability to pay income tax after a sustained period of non-residence, generally one year or longer. But to legally and permanently U.S. tax liability on their worldwide income, U.S. citizens must also give up their U.S. citizenship and passport.

“Big Media” emphasizes the tax aspect of expatriation when it trains its focus on high-profile expatriates like Eduardo Savarin or Tina Turner. But the truth is that the vast majority of individuals who give up U.S. citizenship or permanent residence pay at least some tax in their adopted country.

I’ve discovered the motivations for our expatriation clients to take this step are more nuanced than mere tax avoidance. Several non-tax factors make it increasingly difficult for U.S. citizens or permanent residents to live outside the United States.

A case in point is the overwhelming compliance burden U.S. taxpayers living overseas face. The information 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 TD F 90-22.1, the “foreign bank account reporting form.” Fail to file this form and you could be imprisoned for five years and fined $500,000. True, sanctions typically are much less severe, but many other mandatory disclosure forms exist, all of them easy to miss, and all with significant penalties for non-compliance.

What’s more, U.S. laws force foreign banks and other financial institutions to enforce U.S. tax and reporting rules with respect to their U.S. clients. If the banks fail to do so, they face a 30% withholding tax, starting in 2014, on many types of U.S. source income, and possibly on other capital transfers. In many cases, it’s easier for foreign banks to “fire” U.S. clients than deal with this risk.

The upshot is that many Americans, especially those already living outside the United States, have decided that their U.S. citizenship or permanent residence is more trouble than it’s worth.

Obviously, the decision to turn in your U.S. 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 do so.

If you think you’re a possible candidate for expatriation, The Nestmann Group, Ltd. can assist you in every step of the process. We can help you acquire a suitable citizenship and passport, choose a country in which to acquire permanent residence, and assist with every phase of your expatriation. Contact us today for more information at [email protected].