Global Residence and Citizenship Handbook. Christian H. Kälin

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       Giving up US Citizenship or a US Green Card

       By Dr. Marshall J. Langer* and Prof. Denis Kleinfeld**

      Chapter Summary

      According to the Treasury Department there was a record number of US residents expatriating in 2015, up from 3,415 in 2014 to 4,279 in 2015. Prior to 2010, the recorded number of expatriates was always well below 1,000 persons.

      Exit taxes are deliberately punitive, and have been designed specifically to prevent the highest taxpayers from leaving by removing virtually all of the financial benefit gained by doing so.

      Giving up US citizenship is a complicated business, and a wide range of factors must be taken into account, including residence, domicile and citizenship, marital status and the status of beneficiaries, sources of income and location of assets, and the timing of any move. You must also acquire another citizenship to replace the one given up.

      The exit taxes do not apply to everyone who gives up US citizenship; there are two key tests to determine whether you are caught by it. The first is based on income tax liability over the past five years and the second is based on your net worth. There are exclusions for certain items when calculating your net gain, and gains and allowable losses are taken into account.

      Once you have relinquished or renounced US citizenship, and paid exit taxes if necessary, you must still take care not to fall back into the US tax pool by spending too many days there.

      Depending on your new passport, you may need to obtain a visa to enter the US again. There is also a significant tax on gifts or bequests that you subsequently give to any other US taxpayer once you have left.

      Taxation is not the only reason why Americans give up US citizenship or terminate long-term US residence, but it is frequently considered by wealthy individuals who are already living abroad or plan to do so permanently. Unlike citizens of France, Germany, Switzerland, the UK and other countries, US citizens remain almost fully subject to US income and death taxes even if they never intend to return to live in America. Despite tax treaties, they are often subject to at least some double taxation.

      Thousands of wealthy British residents have already left Britain to avoid the maximum income tax rate which has been as high as 50% and is currently 45%. They have tried to escape British taxes by changing both their residence and their domicile. They can retain their British citizenship and their British passports which are also, for now at least, EU passports. Many wealthy Americans do not yet fully realize that they may now be facing combined federal and state income taxes that exceed the rates that have caused people to leave Britain. In some cases, the combined corporate and individual income taxes on dividends received from US corporations may exceed 60%.

      The US applies all eight tentacles of the ‘tax octopus’. To escape US income, gift and death taxes, you must consider each of the eight tax tentacles:

      •Residence – you cannot have a green card, and you must avoid meeting the substantial presence test by spending too many days in the US

      •Domicile – you must terminate your domicile in any US state or territory

      •Citizenship – you cannot be a US citizen since the US taxes its citizens on a worldwide basis

      •Marital status – you must take steps to eliminate the application of any “community property” rules under which each spouse is entitled to a half interest in most income and property acquired by the other spouse during the marriage

      •Source of income – you must eliminate or minimize any taxable income from US sources

      •Location of assets – you must eliminate or minimize holding any assets that would be subject to federal or state gift or death taxes

      •Timing – the timing of various acts must be carefully considered (for example, you might sell your family home before you leave but try to postpone receipt of foreign-source income until after you go)

      •Status of beneficiaries – several special factors must be considered if your spouse or any of your other intended beneficiaries will remain US citizens or residents

      •While the percentage of the total population of US residents actually expatriating is quite small, the fact is that the reported numbers only reflect those officially listed by the Internal Revenue Service (IRS). This does not include residents who have merely left with no intention of returning but have not formally renounced their citizenship in the US. Many of those who have formally renounced their US citizenship or residence have done so since they were returning to a country in which they were born (such as South Korea) that does not permit them to retain another citizenship. Many countries permit dual citizenship, but some do not

      If you expatriate, the new US exit tax law enacted in 2008 aims to make you promptly pay an exit tax on most of your previously untaxed worldwide gains and deferred income. In those cases where this tax is permitted to be postponed, the IRS makes sure that you cannot escape the exit tax or reduce it by using tax treaties. Finally, a nasty new special income tax is imposed on any US citizens or residents who receive gifts or bequests from you exceeding USD 14,000 a year at any time in the future. The bottom line: the new rules are designed to remove most or all of the tax benefits you might derive by leaving. The government wants to encourage you to stay and pay.

      The US Congress didn’t enact the first constitutional income tax on individuals until 1913. The US income tax rates in early years were generally quite low. The US Supreme Court decided in 1924 that it was okay to apply the income tax to US citizens living abroad as well as to everyone residing in the US. Despite the fact that the case involved less than USD 1,000 and the result was questionable, it is almost inconceivable that either Congress or the courts will ever change it. Today, the US is the only developed country in the world that taxes not only its residents but also its citizens, even those who have never lived in the US or who have lived abroad for many years.

      Having or acquiring another citizenship is a practical necessity for anyone seeking to reduce or eliminate US federal, state and local taxes that are becoming more confiscatory each year. Some Americans acquire a second citizenship through ancestry or by marriage; others do so through a citizenship program such as that of St. Kitts and Nevis. Dual citizenship does not eliminate US taxes if one of these is US citizenship.

      Are you a US citizen? For many of those reading this the answer is obvious. They were born in the US or have been naturalized, and they have never done anything to lose their American citizenship. However, US citizenship is also acquired by birth abroad if at least one of your parents was a US citizen and has met minimum US residence requirements. These rules have been changed several times and your actual citizenship will normally depend on the law in effect at the time you were born.

      A child born in the US to a mother who is an alien simply visiting the US at that time is a US citizen. A child born in the US whose parents are illegal aliens is also a US citizen. Anyone born in the US and “subject to its jurisdiction” is a US citizen by birth even if neither of his or her parents were US citizens or US residents. The only children born in the US who are not subject to its jurisdiction are the children of ambassadors or other representatives of foreign countries.

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