More Americans Are Renouncing Their Citizenship5 min read . Updated: 18 Oct 2020, 05:45 PM IST
- Nearly 37,000 have expatriated over past decade
Rock goddess Tina Turner did it. So did Facebook co-founder Eduardo Saverin and, later, British Prime Minister Boris Johnson. All were Americans by birth or naturalization who decided to renounce their citizenship.
In the past decade, nearly 37,000 Americans expatriated, according to the Federal Register, the official journal of the federal government, which publishes the list of names quarterly.
But this year promises to set a record.
In the first two quarters, more than 5,300 people turned in their passports or green cards, nearly matching the total that expatriated in all of 2016, the previous record-setting year, according to the published list. If the trajectory persists, more than 10,000 people could renounce by the end of the year.
Or maybe not. It turns out the list isn’t always up-to-date.
Of the 2,907 names published in the Federal Register for the first quarter of 2020, only three actually expatriated this year, according to the Internal Revenue Service, which compiles the list. Of the remainder, 941 expatriated in 2019, 441 in 2018, 736 in 2015 and 713 in 2014. An additional 76 were sprinkled across other years.
According to the IRS, the delays reflect when the agency receives information from the State Department, Department of Homeland Security or individual expatriates.
The IRS didn’t provide a similar breakdown for other quarters, so it’s impossible to say for sure which year, if any, has stood out since the U.S. began publishing the names in 1996. But no matter when the paperwork was completed, an unprecedented number of people have renounced their citizenship since 2010.
Compared with the 36,840 names that have appeared on the Federal Register’s expatriation list this decade, fewer than 2,500 were published for 2005 through 2009.
The most likely reason for the recent exodus, financial experts surmise, is a desire to stop filing U.S. tax returns—although some former citizens say they had other reasons for making the move.
When Ms. Turner, who was born and raised in Tennessee, relinquished her citizenship in 2013, she’d been living in Switzerland since 1995 and had married there.
Mr. Saverin, a Brazilian by birth, became an American citizen in 1998 and expatriated in 2012, shortly before Facebook filed for an initial public offering. He has said the decision wasn’t related to taxes.
Mr. Johnson was born in New York when his British parents worked there but only decided to relinquish his citizenship in 2016 after he had sold his home in north London and found out he might owe $50,000 to the IRS in capital-gains tax.
More than 9 million Americans live overseas, according to the Department of State, but in the past, rules requiring them to file an annual tax return with the IRS weren’t strictly enforced, and some might not have even known it was necessary. (The U.S. is one of only two countries that require citizens to file a tax return no matter where they live; the other is Eritrea.)
That changed in 2010 when the Foreign Account Tax Compliance Act was passed, requiring all non-U.S. financial institutions to identify their U.S. customers, a rule intended to combat terrorist financing and tax evasion by people with offshore accounts.
“The general idea is that if you want to do business in the U.S., you have to go through your accounts and find all the Americans wherever they are situated and tell us about them," said Erin Fraser, a senior associate with the law firm Farella Braun + Martel LLP. “If you do, you can do business in the U.S."
In some cases, financial institutions opted out and instead closed their American patrons’ accounts.
“Being told your bank is literally terminating your account is not only upsetting, it’s terrifying," said Chris McLemore, a partner at Butler Snow UK.
The IRS couldn’t provide information on how many Americans living overseas file tax returns, and demographic information on the group is difficult to come by, but the Federal Voting Assistance Program, which is mandated to report on the registration and voting activities of U.S. citizens living overseas, estimates that 15% earned $19,999 or less in 2018; 41% earned between $20,000 and $74,999; and 43% earned more than $75,000.
“The story is often about tax cheats who leave for tax reasons, but modest-income Americans realized they were supposed to be filing taxes, and it was a huge headache," Mr. Fraser said. “You needed an international tax accountant who you’ll pay $1,000 plus each year, at least. That’s not cheap."
There is also a cost to renouncing citizenship (in addition to the $2,350 fee).
The rules are complicated, but, in general, an exit tax is calculated for individuals with a net worth of more than $2 million as if they sold all of their assets the day before expatriating. (The first $2 million of net worth is excluded from the calculation.)
“Let’s say you have a $5 million gain in a house in San Francisco, and you want to expatriate," Mr. Fraser said, referring to the taxable value of the home. “If it worked the way it’s meant to, you’d pay tax on $3 million."
But it doesn’t necessarily work like that.
Instead, citizens and long-term permanent residents can take advantage of lifetime gift-tax exemptions before deciding to renounce their citizenship. Gifts must be made long enough in advance that there is no appearance of a plan to gift and then expatriate, but a recent law might have made this more appealing.
The 2017 Tax Cuts and Jobs Act raised the amount an individual can give tax-free through lifetime gifts or bequests from around $5 million to $10 million. (The 2020 inflation-adjusted figure for an individual is $11.58 million; for married couples, it’s double that.)
But not for long.
“The $11.58 million exemption goes back down to $5 million at the end of 2025 without any change in law," Mr. Fraser said. “If you stay, it’s likely you’ll pay tax up to 37%."
Or you can give away your assets and expatriate.
To do so means forfeiting the right to vote, receive U.S. protection or assistance while abroad and other benefits.
But for some Americans, that might feel like a small price to pay to avoid the financial burdens of living overseas.
This story has been published from a wire agency feed without modifications to the text.