U.S. exit tax framed to discourage giving up citizenship for financial reasons.
An increasing number of Americans have decided that the cost and hassle of hanging on to their citizenship is too taxing, according to federal data, and this certainly deserves financial advisers' attention.
About 1,800 people renounced their American citizenship during the first half this year, compared with about 1,000 for all of 2012, according to Internal Revenue Service data published last month.
Some Americans are giving up their U.S. citizenship to save on taxes, said adviser Andrew Fisher, president of Maxim Global Wealth Advisors.
But many more just want to be relieved of the paperwork aggravation that holding on to their U.S. passport demands.
“Oftentimes, the financial benefit to giving up citizenship is not what one would assume,” Mr. Fisher said. “The new exit tax rules make it such that you are effectively taxed on your estate at the time you give up citizenship.”
Essentially, the U.S. exit tax is framed to discourage citizens from giving up their citizenship for financial reasons, Mr. Fisher said.
It assesses a tax, similar to the amount of an estate tax, based on the value of the citizen's global estate when they renounce citizenship.
FATCA rules
After that, the biggest tax benefits would be for those living in low-tax countries such as Singapore or Switzerland.
For clients living in a high-tax country, such as those in Western Europe, there isn't likely much financial gain, Mr. Fisher said.
The jump in the number of Americans giving up their U.S. passports so far this year comes as the nation is poised to implement the Foreign Account Tax Compliance Act, which requires foreign institutions to report all assets owned by Americans. It is aimed at trimming some of the $100 billion a year in taxes that Americans evade.
It was set to take effect July 1, but foreign financial and other institutions have been given another year to comply.
“The FATCA rules on information sharing between international financial institutions is a fact of life, and that kind of information sharing is only going to increase among governments and make it harder to have undisclosed assets,” Mr. Fisher said. “In that environment, a certain number of people will choose to separate from the U.S.”
The vast majority of the 6 million Americans living abroad retain their U.S. citizenship because they have children or other family in the country, or have homes in America, too.
“They decide that whatever taxes are saved wouldn't be worth divorcing themselves from the U.S.,” Mr. Fisher said.
Lifelong restrictions
Financial planner Robert Keats, president of Keats Connelly and Associates LLC, said he thinks that as many as 90% of those who renounce their U.S. citizenship are advised to do so by a non-U.S. accountant or adviser who doesn't really understand the implications.
“Most of those giving up their U.S. citizenship don't realize the restrictions they are going to have on them for the rest of their lives,” Mr. Keats said. “Once I explain it to them and they understand it, they say no way.”
For instance, any money that someone who gives up their citizenship later leaves to a U.S. citizen automatically becomes eligible for inheritance tax. Also, if they visit the United States and spend more than 31 days in the country in a given year, they will be taxed as a U.S. citizen for the whole year.
In addition, since the Reed Amendment was approved in 1996, those who the government says gave up their citizenship for tax reasons aren't eligible for visas or admission.
Jim Duggan, a tax attorney at Duggan Bertsch LLC, said that he almost never meets with a client where taxes were the only reason they gave up their citizenship.
“Taxes are a driving factor for many, but I rarely see it as a sole factor,” Mr. Duggan said. “Many of these are people who have mentally split ways with the United States, as well.”
Some of the other intangible reasons include an expat living abroad fed up with the compliance burden, those seeking foreign banking relationships that may not take on U.S. citizens, ideological parting of ways with the U.S. government or those who have found a significant relationship in a different country.
