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U.S. tax rules and the increasing number of Americans giving up their U.S. citizenship

By Daniel Shillito - Topics: Investments, Residency, Tax, Uncategorised, wealth management
This article is published on: 4th September 2014

As the U.S. asset disclosure rules on foreign banks are now becoming effective, it’s interesting to note the number of US citizens giving up (and considering to give up) U.S. citizenship.

The U.S. government provides quarterly numbers of the number of people renouncing citizenship of the U.S. – however many say those numbers are underestimates.

Official numbers state that for the calendar year 2013, a record 3,000 US citizens chose to give up their passport and renounce US citizenship (figures from the Office of the Federal Register, USA). This figure is up 221% from only 932 people in the year 2012.

So far in the first 6 months of 2014, some 1577 people have renounced which is only the second time this number has been higher than 1500 since records started in 1998. This can be compared to much smaller numbers in the past. For instance, from 1998 to 2008, the official number of people giving back their US passport was approximately 500 people annually, with the highest being 764 people in 2005.

However in the past 5 years almost 9,000 people have given up citizenship.

To effectively have your citizenship renounced, the US Department of State issues you with a “Certificate of Loss of Citizenship” after you have renounced your citizenship before a diplomatic or consular officer of the United States in a foreign country, and usually taken part in 2 interviews.

For the renouncement to be acceptable to the US, an American must generally show 5 years of US tax compliance (or pay the following taxes). In any case, if you have been paying more than US$157,000 in annual US income taxes, or if you have a net worth greater than $2 million, then you are subject to US exit taxes (more details can be found on the IRS website).

The tax calculations are effectively unrealized capital gains taxes (market value less purchase cost), and are based on the market value of your assets at the date of permanently leaving the US. There is a tax-free gain amount however, and for the calendar year 2014 this is the first $685,000 of gains.

Aside from taxes, the U.S. State department has just raised the fee payable to renounce your citizenship from US$450 to US$2,350. That’s a 422% fee increase, described by the government as required to fund the costs of administration of the process today.

Most expatriates are motivated by family, work and convenience factors when deciding to renounce citizenship – however costly and complex tax situations can sway a decision or become a deciding factor for some. The U.S. is the only member country in the OECD that taxes citizens wherever they reside in the world.

Many foreign banks and investment companies have made it clear they cannot and do not want to deal with, or accept US citizens as clients, as a result of the FATCA disclosure and reporting regime now imposed by the US government upon foreign banks and financial institutions with American citizens. If they fail to disclose and provide personal details about American clients, these organisations face a 30% withholding tax on any US sourced income being sent overseas. In addition, June 30 was the deadline for turning over information on Americans considered in breach of U.S. tax rules.

Article by Daniel Shillito

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