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Are Taxpayers Moving to Avoid More Taxes?

July 19, 2010 · 6 comments

It’s funny, my line of work. I practice tax law alongside my husband who practices international and corporate law. A significant portion of his practice involves business immigration work for companies who are interested in setting up shop here in the US. It’s always interesting to me, then, to read about taxpayers who are interested in renouncing their citizenship for taxes since so many of our clients are desperately trying to get here in the first place.

Yet, according to the Financial Times (registration required), that’s what wealthy Americans are doing. The government reports that as many as 743 Americans gave up their citizenship last year. It’s not a big number in the scheme of things but still represents a significant increase – it’s three times as many as did it in 2008. And, according to the article, the numbers are most apparent in the UK where there is a waiting list at the embassy in London of Americans waiting to give up their citizenship.

It’s an interesting phenomenon. You may remember that Elizabeth Taylor, born with dual UK and US citizenship, publicly spoke about giving up her American citizenship in the 1960s. At the time, she was accused of doing it for tax purposes, but claimed it was for the love of her then husband, Sir Richard Burton. She said about the decision, “It is not true that I love America less, but I love my husband more.” Reportedly, the State Department refused to approve the request since Taylor refused to say that she renounced “all allegiance to the United States of America.” What actually happened is a bit unclear (depending on which “facts” you believe) but what is certain is that it made for big news. Giving up one’s citizenship isn’t something taken too lightly.

However, in an era of increased scrutiny on foreign accounts, those US citizens who don’t actually live in the US may find it tempting to pack up and leave. US citizens are subject to tax on their worldwide income, not just their US-sourced income. The “global tax” rule applies not only for income tax purposes but for federal estate tax purposes, as well. This may not make a difference in 2010 (when there is no federal estate tax) but could be appealing in 2011 when the federal estate tax is set to make a re-appearance.

Of course, there are few citizens that would likely flee the country in search of a better tax domicile – and if they did, the UK is not likely to be their first stop since it is not an overtly tax-friendly country. Most likely, those in the queue to renounce their citizenship are long-time residents of the UK hoping to avoid additional reporting and taxing requirements in the US.

However, it’s not simply a matter of tossing your passport into a pile and walking away. Renouncing your US citizenship can have significant financial consequences. At the top of the list is an expatriation tax. As part of the Heroes Earnings and Assistance Relief Act of 2008, the rules which govern the expatriation tax have been tweaked a bit to be more in line with rules in other countries. For those who choose to renounce US citizenship or legal permanent residency after 2008, the rules (with some exceptions) impose a tax on property owned as of the day before the expatriation date subject to an exclusion amount ($627,000 in 2010). The rules can be tricky: dates, values and other facts are of the utmost importance. Using a tax professional to assist with these kinds of transactions should be a no-brainer.

All of that said, the idea of giving up one’s citizenship for tax purposes is just so – pardon the pun – foreign to me. The Brits do some things quite well (scones, cider and cheddar, to name a few) but I can’t help but think how odd it would be to hear the Pledge of Allegiance or Star Spangled Banner and know that didn’t apply to me anymore. And I say this as someone who lived in the UK for a year and absolutely loved it. My husband lived in Germany for five years and considered it like home. But home is really here, in the US. I don’t know how much money it would take to change that (assuming, as this post assumes, that the primary reason for renouncing citizenship would be, as the FT alleges, for tax purposes). So, I’m curious: how much would it take for you to make that decision? Where’s the line – for tax reasons – that would cause you to renounce your citizenship?

{ 4 comments… read them below or add one }

1 Mark July 19, 2010 at 3:14 pm

For me, it all depends on if I plan on ever returning to the US. Certainly no US tax burden would ever get me to pack up and leave, but if I moved abroad and never planned to return to the US, I think I’d drop my citizenship pretty easily. What does it matter, really? Home is home no matter what, so why bother paying US taxes on worldwide income if I’m not getting any services in the US anymore?

2 J G July 19, 2010 at 10:46 pm

Along the same lines – I’d certainly leave PA if I could manage to sell my house. The property taxes are killing me and the inheritance tax, if you’re not married, is another killer, somewhere around 13% I think.

Got any solutions at the local level?

3 Steven Roll July 20, 2010 at 8:41 am

With the rise of “location-independent” work arrangements it will be interesting to see if more people from the U.S. start permanently locating to other countries.

Within the U.S., at least, high-income earners have been moving to low income tax locales such as Florida from the days of Joe DiMaggio to the present Lebron James Era.

4 Ross Wolf July 25, 2010 at 3:02 pm

It is clear Obama intends to strip U.S. Citizens of their assets; their children of their inheritance, taxing anything and anybody to pay for his Socialist programs. I have already heard at least a hundred Americans say in the last two months…if only I had enough money to leave the U.S. Obama is doing to America what Hitler did to Germany; scaring off Citizens with money, causing skilled and educated people to leave America for other countries. So many people with money left Germany, before Hitler started arresting millions, Hitler had to close the gate. Could Obama do that? Obama might say you can leave but not with your money.

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