More give up U.S. passports to skirt taxes

Americans are finding a new reason to take the drastic step of giving up their U.S. citizenship, and the gridlock in Washington may push even greater numbers of people to run for the borders. Avoidance of taxes is what many think led Facebook co-founder Eduardo Saverin to renounce his citizenship before the firm's infamous initial public offering that made the wealthy technology guru even richer. Mr. Saverin, who has lived in Singapore since 2009, denies that the cause was taxes. It was also recently reported that socialite Denise Rich (whose former husband, Marc, was indicted for tax evasion and pardoned by President Bill Clinton in 2001)had renounced her American citizenship. She didn't cite tax avoidance, but her “exit tax” is most likely less than Ms. Rich would have owed in coming years if tax rates rise as projected.

CLIFFHANGER

In fact, the coming so-called fiscal cliff is one of the prime reasons the number of Americans permanently renouncing their citizenship is on the rise, according to international planning attorneys. Unless Congress and President Barack Obama agree to changes, as of Jan. 1, the Bush-era tax cuts expire. Taxes on capital gains and stock dividends will then increase, and a 3.8% Medicare tax on net investment income for high earners will kick in — resulting in some wealthy Americans' facing a top tax margin rate of nearly 40% on income and 25% on investment gains. “Lots are worried that Congress won't act in time and they will be stuck with higher taxes and higher capital gains,” said Joshua Rubenstein, national head of the trusts and estate practice for Katten Muchin Rosenman LLP. Kurt Laubinger, an adviser and the president of Potomac Wealth Management, agreed. “[Clients] are concerned about capital gains and dividend taxes rising and the overall uncertainty of what to do today to plan,” he said. Although renouncing citizenship is considered an extreme step by most Americans, the numbers are on the rise. A little fewer than 1,800 people renounced their citizenship last year, an increase of 16% from 2010 and more than the total from 2007, 2008 and 2009 combined. If the amount of those renouncing were to jump another 16% this year, it would top 2,000. In many of the cases that Mr. Rubenstein handles, Americans are renouncing their U.S. citizenship because the expense and hassle simply isn't worth it anymore. Most already live abroad and have dual citizenship. “For Americans residing overseas in particular, they're weighing the costs of having a U.S. passport,” said Jim Duggan, a tax attorney at Duggan Bertsch LLC. Andrew Fisher, an adviser and president of Maxim Global Wealth Advisors in Portland, Ore., said that he has seen more clients with dual citizenship give up their U.S. ties. His firm specializes in helping dual nationals with a connection to the United States. “That connection has become pretty laborious for a number of reasons,” Mr. Fisher said. Renouncing citizenship has become especially popular with the ultra-wealthy already living in international tax havens like Bermuda, the Cayman Islands, Switzerland, Cyprus and Singapore, he said. The United States is one of only a few nations that require tax payments from citizens already taxed by their foreign nation of residence. In recent years, the Internal Revenue Service has increased penalties on American expatriates who don't report their foreign bank accounts and pressured overseas banks to provide U.S. client names. In 2009, Switzerland-based UBS AG paid $780 million to the Justice Department to avoid indictment for helping 19,000 wealthy Americans keep about $20 billion in hidden accounts. A law that goes into effect next year will require foreign institutions to report all assets owned by Americans. The prospect of the new requirements is making it harder for American citizens to find institutions willing to open accounts for them overseas, and many foreign banks are concluding that they no longer want to deal with U.S. taxpayers, according to Mr. Duggan. Many Americans in Singapore have said they have had trouble finding a bank that will even talk with them, he said. “The rules are just making it more difficult for people who live abroad,” Mr. Duggan said. Of course, the number of U.S. citizens re-nouncing is infinitesimal for a country with a population of 314 million. Not many financial advisers have had clients relinquish their U.S. passport. “Over the last 27 years, I don't remember anyone thinking seriously about renouncing,” said Tom Hoffman, an adviser at KAF Financial Advisors LLC. “They've kidded about it, but no one has ever done it.”

NOT SO EASY

For Americans without a second passport, the first step in renouncing is to gain citizenship in another country. Even after that, the process can take several months and require lots of documentation. “You can't just throw your passport away,” Mr. Rubenstein said. Before giving up citizenship, a person has to have been tax-compliant for the previous five years and pay an “exit tax” if he or she has at least $2 million in net worth or had average net income tax liability of $145,000 for the previous five years. The tax due is based on inherent gain on all assets worldwide and is 15% for most capital gains, 28% for gains of fine art and 35% on property that doesn't qualify for the capital gains tax, Mr. Rubenstein said. Given the sluggish economy and lower value of some assets, this may be a great time to renounce, he said. Another reason that people are renouncing their citizenship is philosophical. Some seek to give up their U.S. passports because they are dissatisfied with the U.S. and worry about where it is headed, according to attorneys. “That dialogue is new, and a lot of people have soured on the U.S.,” Mr. Duggan said. “The stigma to offshore planning isn't what it used to be.” lskinner@investmentnews.com Twitter: @skinnerliz