Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules
online.wsj.comI wish the title of the article better reflected the real point - explained in the article itself - instead of saying "escape tax rules", with all the implications
The fact is, more and more of us with solid middle-class incomes and perfectly normal lives are becoming increasingly concerned about laws that are poorly explained and advertised to us, but with huge potential penalties if we go unaware of them. These are exclusive to people living in other countries - if they imposed some of these on non-expatriates, there would be a riot.
It is becoming a very stressful burden.
The paperwork burden caused by poorly known and viciously complex tax rules is probably the first reason people give me for cancelling citizenship. Especially since the US government seems hellbent on imposing astonishingly large penalties for paperwork failures.
The risk is too large for middle class people.
The second tax reason people give is the estate tax.
A family friend ran into this. She lived in Canada nearly all her working life and only heard about having to file paperwork with the US when it was being announced there was going to be a crackdown due to the recession.
Fortunately between her and her husband they had enough money to get a good lawyer and get it sorted out before they tried to nail her for all the tax she owed.
I think the biggest issue with the "tax by citizenship" is that it turns US citizenship into a commodity to be traded for personal benefit.
It's noble to try to chase the tax dodgers, but it's a lot more practical to tax the people who stay and ensure anybody who wants to flee is going to be losing sizeable amounts of their property.
Canada has investment rules based on nationality/citizenship and the owners of those shares can't just elope and expect to keep their controlling interests. In fact most of the big companies that face these rules have their foreign investments near maximum, so that anyone fleeing would be forced to sell all their stake and selling a big stake of any company means selling at a sizeable loss.
>"U.S. citizenship is the most coveted citizenship in the world. To give it up, it has to be pretty serious,"
It's pretty serious to give up your birth citizenship no matter where you're from. But, as someone with American citizenship, this doesn't ring particularly true for me. There are a number of passports I would trade, today, right now, for the one I currently hold. Anyone claiming American citizenship is the most coveted in the world is saying a lot more about themselves than they are the US.
What countries's citizenships would you suppose is coveted by more people worldwide than the US?
Any EU citizenship is more useful and less dangerous and more lucrative and more flexible and subjects you to less world-wide paperwork, tax, and business restrictions.
So Estonia, Poland, Romania, Bulgaria, Slovenia (or is it Slovakia?), Lithuania, Latvia, Slovakia (or Slovenia?), and Greece have more valuable passports for their citizens.
If you travel a lot in East Asia, Japan's passport is awfully useful and has much nicer perks than US citizenship.
Obviously, France, Britain, Canada, Germany, Italy, Sweden, and other core wealthy nations have much, much better deals for citizens, too.
The US passport and citizenship is more and more like a third world quality passport every year, with one major exception. That exception, of course, is the right to live in the USA, which is a dang nice country with excellent open country, parks, forests, space to breathe free, big highways, fishing, hunting, the right to keep and bear arms, and fine honest people.
But if you don't love this land, you're better off with Latverian or Hungarian or Freedonian citizenship, because our politicians have done squat to keep our citizenship valuable around the world.
This. Also Iceland and NZ. Pretty much any developed country, really, because among those the US stands alone in subjecting its citizens to this onerous tax filing BS.
Obviously, if you want to live in the US, that doesn't apply. Just plan on staying there, or only living abroad for a year or two.
It sounds like you're talking about the usefulness of citizenship for traveling. But the quotation discussed by deciplex, and his statements, are not qualified in this way.
Extensive nation-hopping is not something most folks in the world can do. (The "onerous tax filing" being even more of a rich-person's problem.) I'd guess that the US citizenship is in fact the most coveted worldwide, all things considered.
Well, at least you admit you're just guessing...
And, did you bother to read the article? I'm surprised you write off these regulations for expats as 'rich-people problems'.
The typical American moving abroad is richer than the median American, and the median American is much, much richer than the vast majority of humans on Earth. The middle-class person being discussed in the article had $100k in the bank, which is more than most humans earn in a lifetime.
So yes, rich-people's problems.
Yes, I suppose we should all learn to deal with oppressively stupid regulation until world peace is achieved and no one goes hungry.
I really don't get your point. So, if you are 'rich enough' (note: the people in this article are solidly middle-class) to actually maybe be affected by and give a shit which passport you've got, your opinions are immediately written off as 'rich people problems'. On the other hand if you're among the poor in the developing world and your passport is perhaps not something you'll ever think about or care about, then because maybe according to jessriedel you might prefer a US passport to e.g. a French one or a Swedish one or whatever, the US passport is 'the most coveted in the world'. Despite (apparently too rich to count) people giving them up in record numbers.
I'm fascinated to hear other opinions you hold on random shit, if this is any indication of how you arrive at your conclusions. Do tell.
You're completely mistaken about my position. I also haven't said anything to warrant your rudeness.
> I'd guess that the US citizenship is in fact the most coveted worldwide, all things considered.
You're assuming people want to live in the US.
The first world ones are all pretty much equivalent in terms of getting you around, one or two countries difference with no Visa among the top, not sure where the discrepancies are...
http://www.ibtimes.com/best-passports-have-unrestricted-trav...
US citizenship means you have tax liability on income overseas and dealing with a few weird things like the Cuba embargo, but you're also a citizen of the most powerful nation on earth, which does matter if you get stuck in a revolution or something.
switzerland?
canada?
Quite a few people I know would prefer to travel on an American passport because it offers less hassle than most other passports. We have fewer VISA requirements, etc.
We have somewhat shot ourselves in the foot here or there since we tightened travel restrictions on some countries. But it's still an incredibly good passport to have for traveling.
magamiako, your account is hell-banned.
How do you see hell-banned posts?
Go to your 'profile' (click your username in the upper right corner when logged in) and set 'showdead' to 'yes'.
It's just WSJ rah rah blind patriotism and running interference for moneyed interests.
Obviously USA has a lot more to offer a plantation worker in Honduras than a wealthy retiree who might need some medical care.
I was quoted in this article. I do lots and lots of this work -- helping people log out of the USA cleanly and permanently. AMA.
Here's something I've been wondering, totally hypothetical but could be real for someone else:
Puerto Rico has this new tax law that basically limits taxes to like 4% or less, if you are a resident of PR. Let's say Bob is an American who expects to have a big exit in 2015 (or he has lots of GOOG stock and wants to sell it). Normally Bob would pay US capital gains taxes (15-20%, maybe 23.8%), plus California taxes (assuming he lives in CA). Instead, Bob moves to Puerto Rico, establishes residency. Then he sells his shares for US dollars, and pays Puerto Rico taxes. Then Bob moves back to mainland US, having saved lots of money.
Is there a flaw in the above situation?
Yes, the flaw in the above scenario is that for capital gains that have a cost basis that began prior to becoming resident in Puerto Rico ("built in gains"), you will owe taxes at both the US federal and Puerto Rican levels.
3 scenarios:
If the business was started and sold prior to becoming a Puerto Rican resident, then taxes would be owed at US federal and state levels like normal.
If the business was started while resident on US mainland and then you moved and became resident in Puerto Rico (the OP's scenario), it gets a lot more complicated. Just considering capital gains from a sale of the business to keep it easier, you will owe taxes to both the US and Puerto Rico. These are called "built in" capital gains. You can look up details on this, but taxes are owed to the US and to Puerto Rico at rates that change over time depending on how many years you are resident in Puerto Rico before selling the business. This is the most complicated scenario.
If you start a qualifying Puerto Rican business after becoming resident in Puerto Rico and after having been accepted into Act 22, then you would start with a zero cost basis. This is the best case scenario. When you sell this business, you could owe 0% capital gains. However, during the lifetime of this business, you will still pay FICA taxes (15.3%) on earned income to the US Federal government up to the regular cut off levels, personal Puerto Rican earned income taxes on a portion of your income, and 4% corporate tax on business income. This is the easiest scenario since it starts with a zero cost basis.
Btw, IANAL.
TLDR 1.) Started & sold business in Cali, no capital gains tax benefit. 2.) Started business in Cali and sold after becoming resident in PR, crazy complicated, but taxes do apply at both federal and puerto rican level. 3.) Built and sold business in PR after acceptance into Act 22, and after becoming resident in PR, 0% capital gains tax, but other taxes apply during the lifetime of the business.
For those interested, residency is 183 days per year.
US citizens overseas are required to declare all income (and capital gains) to the IRS regardless of source. They still have to file returns in the US. Bob will owe tax as a result, but he can probably write off the 4% he payed in PR against his US taxes. He's not a resident of California, so he likely avoids the state tax.
(Note: I don't know specifically about Puerto Rico, but generally the above is the case for US citizens in foreign countries.)
That's why I asked about Puerto Rico. Puerto Rico is a territory of the US, so it isn't considered "overseas". If you google it, you'll see what I'm talking about. Here's a link: http://www.marketwatch.com/story/puerto-rico-woos-rich-with-...
I did Google it, and I found this http://premieroffshore.com/move-puerto-rico-pay-zero-capital...
Which seems to support your idea! "Capital gains are sourced to your place of residence."
Any dividend income would be taxable, since you have to file an IRS return for all ex-PR income, but it looks like not the CG.
Quite a loophole - thanks for prompting the research.
EDIT: There are some quite long-term residency requirements to avoid CG on things you owned before moving to PR though. I don't think it'd work in the year timeframe you asked about.
PR is a US Territory. Technically, you never left the country.
"In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are not required to file a U.S. federal income tax return if they have income only from sources within Puerto Rico." www.irs.gov/taxtopics/tc901.html
There are caveats. One that I know for sure is that if you are self-employed, you still must file & pay FICA taxes to the US federal government.
Read up about it, if you can find the time: the Puerto Rico situation is different than all other foreign countries for US citizens.
Puerto Rico is not overseas, it is part of the US...
In this case Bob would pay IRS 20% tax for the price appreciation happened when he lived in CA. The 4% tax applies only to the price gain during his stay in Puerto rico.
This is inaccurate. The 4% number is a figure that applies to businesses that are export related and that apply and receive approval for Act 20. It's a 4% tax on the inc's business income and is unrelated to capital gains.
This sounds reasonable - but can you provide a source?
Also, are you talking about federal taxes or california taxes?
After you give up your citizenship you are still required to file with the IRS for the following ten years, correct? (Assuming you ever want to enter the US again.) What are your tax obligations during that time, though?
After you give up citizenship you file a tax return for that year.
After that you only file income tax returns if you have income from US sources or you become a US resident.
The 10 year rule was repealed in 2008.
> After that you only file income tax returns if you have income from US sources or you become a US resident.
Example: So your US corporation "pays" your Ireland corporation, who than pays you in the EU? Would that avoid the income from being considered US sourced?
The US taxes you on wages only if you are within the borders when you do the work. So a noncitizen doing work outside the USA and getting paid by a US customer or employer is not taxable in the USA on those wages.
You would not need that intervening corporation in Ireland for income tax reasons but there are probably good business reasons for putting a layer between you and the US company.
If you are a US citizen you are taxed on your wages no matter where you are on Planet Earth. Some relief is possible (first approx $100k not taxable, for instance).
@deciplex - you are right if you live in a country with an income tax.
If you live in a country with no income tax then your US income tax is a net cost to you -- making you poorer compared to that British coworker who makes the same salary as you but pays no UK tax. Look around Dubai. Count Americans and count British people. Tax is part of the reason.
Definitely, though in that case since the local tax is 0 the principle still holds.
Thanks for this, by the way, very informative.
>If you are a US citizen you are taxed on your wages no matter where you are on Planet Earth. Some relief is possible (first approx $100k not taxable, for instance).
Correct me if I'm wrong, but after that $100K deduction you're essentially paying the higher of the local tax, or the US tax?
you are paying BOTH - another reason this is an issue.
expats pay tax on full amount to host country, plus tax on amount over $92k to US. So the money over $92K is double taxed - making it "pointless" (not completely, obviously) to earn that extra
Thank you!
Are all non-citizens required to file US tax returns for US source income, or is that a rule specific to citizens?
A large chunk of this forum likely has US source income, so it would be good to know.
If the US source income has tax withheld at the correct amount (default is 30%) then no tax return is required.
The magic is in understanding the metaphysics of the definition of US source. Just because the money comes from a US customer doesn't mean that you have US source income.
If I hire a web developer in Canada and he designs my site whilst sitting in a chair in Vancouver, the income he ears from me is not US source. Weird I know. For services, income is sourced where the human body who did the work is physically located. God what an awful sentence.
Ah, that makes sense, actually. What about someone in Canada, selling a product on a website hosted in the US, with a customer billing address in the US?
My intuition says "not us source" because the production and administration of the product was in Canada.
There are also categories of income which are exempt from witholding, such as royalties. For instance, Canadian authors receive royalty cheques from Amazon with no witholding if they submit a W-8BEN. Is their income "non-US source" because the owner is not resident in the US?
The income tax treaty can reduce US tax on income paid to Canadians down to zero, depending on the type of income. That's what you are seeing with the W-8BEN.
For selling stuff across borders, source of income is where ownership changes hands from seller to buyer. If the buyer owns the item as soon as it goes into a DHL pouch in Canada, then it is Canadian-source income and the US can't tax it.
I guess my question was: is a return required on US source income that has been reduced to zero? e.g. royalty payments, where the receiver is in Canada, and sales of products were made in USA.
Assume the income is from licensing, and the license was granted from a Canadian source.
Thanks for answering all these, I should have been more precise with my earlier questions.
When you give up your citizenship, don't you owe the IRS capital gains tax on all assets you own, as if you had liquidated them? (iirc)
Correct. If you are "rich" ($2 million net worth or $157k average tax bill over the previous five years) then you pretend you sold everything. The first $680k of gain is tax free but you pay tax on everything above that. Bad things happen to your retirement plans and IRAs.
What happens to your retirement plans? Treated as if you withdrew all of them that year?
How often does the WSJ ask you for a quote on this issue? I ask because they seem to run this same story every 6 months or so.
The news cycle for this topic is quarterly since the government releases statistics on that time cycle. That's why you see the topic written about fairly frequently.
I talk to journalists all the time. I try to be helpful in some times they thank me by putting a quote in the article. Sometimes not.
Im very interested in this. Which countries are best for expats from a quality of life and ease of obtaining citizenship standpoint?
You have to solve two problems -- your place of citizenship and your place of residence. Dominica and St. Kitts are the two places most people look to buy citizenship. There are other more expensive places too.
Residence - this is easier to arrange. If the country will give you a tourist visa you're in, at least temporarily.
Any places cheaper than St Kitts/Nevis ($400K)?
Look at Dominica.
Scam artists have been known to exist in selling citizenship in Central America. Be wary. Don't try clever stunts.
Thanks. Dominica looks fairly reasonable at $100K for an individual, and $175K for a couple.
I believe that's Singapore. Albeit, the rules are being changed due to rapid influx of rich foreigners into Singapore causing social issues. https://sg.news.yahoo.com/ferrari-crash-fuels-singapore-anti...
Ferrari crashes in Seattle also fuel anti "rich scofflaw" sentiment...
http://seattletimes.com/html/localnews/2023636226_ferraridri...
If you have lots of money, you can buy citizenship and a sweet tax deal from one of Switzerland's municipalities/cantons.
Two separate issues there :)
This is probably not the right forum to approach you in, but is there any chance you would be able to take a few questions from me either here or by e-mail? I am a dual citizen (but I have never lived in the country) and am so afraid of doing something wrong with regards to US tax obligations. I am especially worried that I would accidentally make myself liable by simply owning my home or having a savings account in my native country.
I realize your job is to handle these things, and I am not in any way trying to say "can you please answer some questions for free so I don't have to hire you later on" - I'm just a regular guy with a regular income and a regular life in another country who happens to have been born to a US citizen a long time ago. I cannot in any way afford to consult with an international tax attorney.
Feel free to ignore this random stranger asking for advice using a throwaway account :-)
A few questions if you don't mind. Do you know if any of your clients who have renounced citizenship have had trouble coming back in to the United States to visit friends or family or for business? Is it common for countries to tax personal income if it was earned overseas and the expatriate lives where the income was earned? Does the US do that? Has the IRS taken any interest in the contacts of your clients who are citizens? Finally, have any of your clients regretted the decision?
No one has had any problems returning to the USA.
The USA is the only country that taxes its citizens who live outside the country. I think that's what you're asking. British citizens living abroad don't pay UK income tax.
The IRS hasn't taken any interest in my clients -- the tax returns are clean and that's all they should care about. But the Lois Lerner affair shows that they are corrupt, unfortunately.
The people I know who give up citizenship almost all do it with extreme regret. I assume this feeling persists even after the fact.
I've been strongly considering expatriating, either to Canada or even more exotic locations such as Dubai/UAE. I have no real intentions of breaking from the US as a citizen, but perhaps you could clarify for me.
1. I've heard that under a certain tax bracket this does not happen. Is that true? 2. I hear Canada will actually let you write off taxes you've paid to the US.
Since a lot of us are thinking it: How do you justify you career as a morally acceptable calling?
Taxes pay for government services, which the citizenry of the United States broadly speaking wants, though they quibble every 4 years about the relative mix and funding levels. Tax laws are complex, highly technical, and require application of a voluminous body of rules to the infinite variety of potential fact patterns.
Many citizens, particularly those who have complicated fact patterns in their personal lives, are not capable of calculating their own taxes or would prefer to avoid doing so. Tax accountants and attorneys assist citizens in their obligations to calculate and pay the taxes required by the law, without paying more than they are obligated to pay.
I have a great accountant. (Hiya Cameron. waves) He sherpas me through my increasingly complicated international tax situation every year, which will never include renouncing my US citizenship but does often include such scintillating topics as "Does the US Revenue Code consider Japanese Self-Employment tax to be an income tax or not? If it does, should my income tax return for 2013 reference Japanese self-employment tax paid in 2013 or accrued in 2013? Is it most to my advantage to treat that as a necessary expense incurred by my business or as a deductible foreign tax or in some other fashion defined by the US-Japan Tax Treaty?" I pay Cameron so that I don't have to spend a week figuring that out, and can instead ship software, write emails, and otherwise move the business forward.
Really? Would you care to elaborate on your position, as it seems a touch sophomoric.
We're talking about American expats who permanently live abroad, do not utilize taxpayer-funded services, and aren't planning on returning home. Hell, they aren't even utilizing what one might call the privilege of American citizenship. From the government's perspective, there's really no difference between an expat and a corpse (excluding the IRS, naturally).
In that context, how can choosing to renounce their citizenship be considered immoral? Particularly when that citizenship comes with the rather significant problems that are the result of a federal tax code that taxes overseas income for taxpayers abroad whose income will never see the United States (nor, for that matter, will the taxpayer). If we're going to argue about ethical codes, how do you taxing worldwide income and the onerous penalties that disproportionately affect the lower quintiles?
Do you cure cancer or save orphans for a living? If not, how do you justify yours?
"The IRS fined him more than $172,000, roughly eight times his back taxes" - this also seems to require some justification.
The US needs to adopt a residency based tax system like the rest of the world.
This would solve so many problems.
The main issue why this remains a problem is that Congress doesn't care about American citizens who live abroad. Congress knows they can abuse Americans who will never comprise a large enough portion of any district for their votes to really matter. This is why people are actually renouncing. They have no other practical solution or representation.
Why does WSJ (and NYT) add extra words to make headlines more awkward?
Is WSJ really trying to argue that expats are dodging tax rules, not taxes?
> Is WSJ really trying to argue that expats ate dodging tax rules, not taxes?
Actually, yes. Maybe you didn't read the story, but it specifically talks about how the major burden for middle class expats isn't necessarily taxes but the penalties for failing to file specific paperwork.
Anecdotally, this is certainly true for the expats I know (including myself). I didn't have to pay any US taxes, but the penalty for not filing excessive disclosure forms on all local bank accounts is very onerous.
This is exactly right. HNers who are US citizens will set up a perfectly ordinary corporation in their country of residence and run their company perfectly legally in that country. Years later they hear of Form 5471. The government's SOP on this is to impose a $10,000 per year penalty then force you to beg for the penalty to be removed. Sometimes that happens. Sometimes that doesn't. How many small businesses could stand a $40,000 or $50,000 hit just because you didn't file a piece of paper saying you owned stock in a foreign corporation?
The greatest part is that now most of these banks are required by law to report our accounts to the IRS. So now that the IRS is notified we no longer have to worry about penalties right? Wrong. Now they have an automated way to detect and fine us.
It's really pretty bad. We're not even talking about the wealthy in many cases. You basically have to have an tax preparer who specializes in expat issues handle your taxes, and they aren't cheap. This is not a job for H&R Block.
It depends on how much money you earn and where you live, mainly. If you make < 100k a year U.S. and pay taxes on it in the country you live in, you can get by with a 1040 and one or two extra forms as far as the IRS goes, and not have to pay the U.S. anything in income taxes.
However, the issue with the WSJ article, where you would also have to disclose retirement and savings accounts or pay a penalty can be an unpleasant surprise for people. Makes me want to just put everything in my spouse's name and pretend the U.S. government doesn't exist.
isaacbrocksociety.ca
This link needs to be here. If you're an American abroad suffering similar treatment, you can find support with these people who are in the same situation. They are trying to help end the US's unfair CBT citizenship based taxation and switch to RBT residency based taxation like the rest of the world already uses.
Any non paywalled link?