The U.S. may be one of the world's greatest nations, but a growing number of Americans are renouncing their citizenship to live elsewhere permanently. Every quarter, the list of individuals who have given up their citizenship is published by the State Department. The list has grown over tenfold since a relative low of 231 expatriates in 2008.
In 2014, there were 3,415 expatriates published in the State Department list, and there are likely others that have fallen through the cracks and do not make the published list. What is the reason for the increase? Lifestyle factors play a role, as do family connections, job opportunities, and possibly even political or social concerns, but the primary reason may be economic.
The U.S. is one of the few countries that tax their citizens who live abroad. These citizens must not only file tax returns in the countries where they live and work, but they must also file U.S. tax forms based on their global income. Tax credits can eliminate some of the double taxation issues, but many U.S. citizens who live and work in foreign countries face nightmares of regulatory and compliance paperwork. The laws are complex and failure to follow them can be severe.
The paperwork starts with Foreign Bank Account Reports (FBAR). If the total value of your collective overseas accounts exceeds $10,000 in a calendar year, you must file an FBAR with the IRS.
In the past, FBAR were calendar year-end submissions, but starting in 2016, the filing deadlines correspond to the April 15th tax deadline. All FBAR are now submitted electronically. Inadvertent errors on FBAR can cost up to $10,000 per violation in civil penalties, and for willful violations, the penalty increases to the greater of $100,000 or 50% of the account balance when the violation took place.
For higher income levels, the Foreign Account Tax Compliance Act (FATCA) kicks in. FATCA requires foreign financial institutions (FFI) to supply the IRS with information about the accounts held in their institutions by U.S. taxpayers. When the aggregate amount of foreign-held assets exceeds $50,000, U.S. taxpayers must fill out IRS Form 8938 to detail the nature and amount of these accounts, and submit it with their tax returns. Filing a Form 8938 does not release you from the obligation of filing a FBAR; you must file both forms at higher income levels.
The intent is to keep individuals from hiding their incomes in foreign tax havens, but the complexity of the law can snare unsuspecting citizens in legal difficulty. Improper valuation of assets or something as simple as an incorrect currency exchange value can place taxpayers in non-compliance.
Over 100 countries have signed on to FATCA, and as a result, many overseas banks have less motivation to accept American business. Larger accounts are necessary just to make the regulatory headaches worth the bank's corresponding compliance efforts.
Higher-income individuals must also pay an exit tax, which is effectively a 15% capital-gains style tax on assets leaving the U.S. At one point, legislation was introduced to double the exit tax to 30%, which is not likely to force the highest income individuals to stay (and certainly, such a bill will not endear them to the U.S. tax system).
Undoubtedly, some U.S. citizens took unfair advantage of previously lax foreign reporting requirements, and there are likely a few who are still gaming the system to their advantage. Unfortunately, the rules are now so complex that some U.S. citizens with foreign dealings and more moderate incomes are being hit with regulatory compliance issues that are not straightforward. It appears that a growing number of them are deciding that retaining U.S. citizenship is no longer worth the effort.