By Lee Sherman
With taxes expected to rise for people making over $400,000 a year, you may be thinking that now might be a good time to become a citizen of another country.
In addition to hiking up taxes, the Biden administration plans to pay for its ambitious agenda by cracking down on tax evasion and eliminating loopholes. For wealthy Americans, the grass might seem greener elsewhere but this isn’t a decision that should be made lightly. Remember, giving up your US citizenship means giving up your right to vote in the US, social security and medicare benefits, health insurance, your driver’s license, and other benefits.
While many of these benefits may be replaced by equal or greater benefits (depending on the country), you may be surprised by what it means to renounce your US citizenship. The tax benefits may not outweigh the negatives.
Even before the new Biden administration took office in January 2021, Americans were renouncing their citizenship in response to the Foreign Account Tax Compliance Act (FATCA) which was passed in 2010. This law requires taxpayers to report foreign-held assets to the IRS and pay taxes both in the US and in the country where the assets are held, effectively leading to double taxation. This law applies to foreign income in excess of $50,000, and applies to all foreign assets, even those stored in offshore financial centers (OFCs), a.k.a. Tax Havens. US citizens are required to report their assets to the IRS using Form 8938 Statement of Specified Foreign Financial Assets. The FATCA requirements are in addition to Form 114, Report of Foreign Bank and Financial Accounts (FBAR), which existed prior to the new law.
Higher-income earners are subject to double taxation because the US has what’s called citizen-based taxation. You can choose to live anywhere in the world but as long as you remain a citizen, you can’t escape the taxman. If you are earning your income in a foreign country, you will most likely have to pay taxes there as well. You can reduce the burden using the foreign tax credit, a non-refundable tax credit for income taxes paid to a foreign government as a result of income earned there but this won’t eliminate all double taxes.
Breaking up is hard to do
Renunciation isn’t easy. Be prepared to undergo a long legal process. Nor is it cheap. Also, once you’ve decided to do this, there’s no turning back. But that hasn’t stopped it from becoming a popular option, especially for expats. So many people have decided to seek renunciation that the US government raised the fee from $450 to $2,350, which is 20 times the average cost of other wealthy countries. And some high-income citizens may have to pay an additional capital gains tax called an expatriation tax or more commonly referred to as an “exit tax”. Not reporting these financial assets can result in serious penalties and even criminal liability according to the IRS.
If you already living and working in another country, changing your citizenship can help you avoid both high and double taxation. You’ll also avoid the hassle of having to file your taxes in both countries. But you may just be exchanging one tax burden for another.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.