Taxes and American Citizenship

By • January 2, 2013 Comments

Gerard Depardieu made considerable news in the United States recently and the French media has been dominated with news about the famous actor turning in his passport and moving to Belgium. (Since this article was written, Russia has announced it has granted Depardieu citizenship but it is not known if he will accept.)

For those who may have missed it, France recently elected a socialist government and, as promised, after the election raised tax rates on the wealthy with a top tax rate of about 75%. The result has been that those who may have had a yearning (and the cash) for a luxurious property in France can get a great deal as wealthy French have decided they always thought countries like Belgium, England or Switzerland were nice places to live, to eat, and to keep more of the money they have earned rather than turning it over to the French government. The cost of luxury property is dropping as many wealthy French are selling their property and moving on. (A ruling has temporarily derailed the new tax rate but it is expected that the French system will make the necessary changes to reinstate the high tax rate in the near future and Depardieu has said that the ruling “Changes nothing.”)

Depardieu is a special case. He is famous. He is a French icon. The actions of the popular Frenchman do not reflect favorably on the policies of the French government so it has become a newsworthy political and cultural issue within that country. A French government official initially labeled him “unpatriotic” and “pathetic” for leaving and taking much of his money with him and outside the domain of the French government.

Depardieu is known for being outspoken. His response to the French government: “I am leaving because you believe success, creation, talent, anything different must be sanctioned.” And, if that wasn’t clear enough, he added: “I’m sorry to witness how the Socialist government is bringing our country down. This fiscal battering is destroying our talents, our artists, creators, researchers, and entrepreneurs – it’s insane.” He has apparently become something of an anti-tax hero in France while preparing to become a Belgian citizen.

Not surprisingly, Belgium is welcoming a number of wealthy French business executives who have decided to give up living in France in order to enjoy a lower tax rate.

The problem of wealthy citizens leaving their native or adopted country is not limited to France and the reasons for leaving are often similar. And, if you have enough money and are paying a large tax bill in the United States, you may have considered relocating to a country that would enable you to keep more of the money you have earned—perhaps for similar reasons to those expressed by Gerard Depardieu or for reasons similar to the Facebook co-founder who recently renounced his American citizenship.

Taxes in America

There are significant differences between the French and American tax systems. A French citizen can live outside the country, retain French citizenship, and not be subject to French taxes. The United States is one of the few countries that taxes expatriates living outside their country. While the first $95,100 or so is often not subject to American taxes (but not all of it as explained below), the exclusion is not sufficient for those who are wealthy and still paying U.S. taxes while living abroad. And, unlike most countries, there can be a stiff tax penalty for Americans who want to leave the country, particularly for wealthy Americans who wish to renounce their citizenship.

To give up American citizenship, and to escape future American taxes, you may have to buy your way to freedom from the U.S. government. There is an exit tax on the fair-market value of all of your assets — including real estate, securities, businesses and personal belongings — less what you have put into that asset such as the purchase price and improvements.

The exit tax is like an estate tax, in the sense that everything that would be part of your estate will be subject to income tax on unrealized gains as of the day before you expatriate, as if you sold all your assets the day before leaving. In effect, in ensures your assets don’t escape an estate tax. This provision is sometimes referred to as “America’s Berlin wall” as it is obviously intended to keep wealthy Americans from exiting the country.

The term is unfortunate and our moral high ground is more virtuous than other countries that have used this technique but the comparison to the former East Germany under Soviet control is apt in some ways as countries that have used this technique to force citizens to stay within its boundaries are not a list with which a free country wants to be associated in the public’s mind. It includes the former Soviet Union, Rhodesia, and South Africa near the end of its apartheid policy. A similar system was apparently used by Germany in the 1930’s when it implemented a “departure tax” to discourage Jews who wanted to leave to escape the clutches of the Nazi government that was rapidly exerting its control over the country at that time. Perhaps it is ironic that the exit tax was part of the Heroes Earnings Assistance and Relief Tax Act of 2008.

We think of many people from around the world yearning to come to America to participate in the American dream. That is certainly the case. In particular, the number of people coming to the U.S. from Latin American countries has resulted in millions leaving their homelands to pursue a better life here. While we read a great deal about immigration, we do not hear much about emigration. The reality is that more Americans are leaving the country than ever before—even before any deal is reached on the “fiscal cliff” or the United States imposes increasingly higher taxes to try to fund at least some of the spending spree Uncle Sam has been enjoying recent years while incurring huge deficits each year.

The number of Americans leaving is predicted to grow larger when the final figures are calculated for 2012.

How Many Americans are Leaving?

The reasons some Americans want to leave are similar to those facing Depardieu in France—higher taxes resulting from proposals for much higher taxes on the rich (leaving out an argument as to how much income makes a person “rich” in the U.S.) and the likely expiration on December 31 of the current tax rates which are projected to go higher. For U.S. citizens to eventually and legally escape the filing requirements of the Internal Revenue Service (IRS), the only way  to do this is to formally renounce U.S. citizenship. And, for retired federal employees, most of whom are not wealthy, they may still be subject to U.S. taxes even if they are living abroad and have renounced their citizenship.

The number of Americans leaving is still relatively small and the actual numbers vary depending on the reporting entity. The figures as compiled by the IRS for 2012 will probably be about 2000 people. An attorney with a speciality in this area says the number will actually be about 8,000 US citizens but it isn’t clear why there is such a large discrepancy between the IRS figure and his estimate.

In 2011, about 1,800 people renounced their U.S. citizenship or handed in their Green Cards. That number is probably lower than the actual number who left because the list compiled by the IRS is not complete. The 2011 defections were still about eight times more than the number of citizens who renounced in 2008, and more than the total for 2007, 2008 and 2009 combined. There is also a long waiting list in some U.S. embassies of Americans who are waiting for an appointment to renounce their citizenship.

Year Count Year Count
1997 1812 2005 762
1998 398 2006 278
1999 434 2007 470
2000 431 2008 231
2001 491 2009 742
2002 503 2010 1534
2003 571 2011 1781
2004 631 2012  ?

Among the popular countries attracting these former American citizens: Australia, Norway, Singapore, Cayman Islands, Costa Rica, Guernsey and Antigua. In 2012, Canada held, for the first time, a ceremony welcoming new Canadians who were renouncing their American citizenship.

The provisions of U.S. tax laws, and not just the amount of taxes required, are also leading more Americans to renounce their citizenship. Many Americans living abroad were not aware of filing requirements for U.S. tax purposes. And, with the new IRS reporting requirements, living abroad as an American is now more difficult as many institutions do not want to take American accounts as complying with the American reporting requirements are too expensive and too difficult.

Last year, for the first time, Canada held a ceremony for Americans giving up their citizenship and becoming Canadiens. It wasn’t because of the tax rates which are often higher in Canada than they are in the U.S. It was largely because many Americans living there or who want to leave the U.S. for other reasons not wanting to be subjected to the intrusion of the Internal Revenue Service even if they are not required to pay U.S. taxes.

The head of American Citizens Abroad, a non-profit organization in Geneva, Switzerland, says that many of their members are scared about reporting requirements they did not know existed and that this is pushing some Americans to abandon their citizenship. She says that “Americans abroad are terrified. We’ve had people pay tens of thousands of dollars in fines. We’ve had people … pay huge amounts of back taxes.” And, “Up to this point, we never heard of anyone renouncing, or if they did, they didn’t talk about it. Now we’re seeing a lot of people speak openly about it and come to us for information.”

Federal Employees Who May Choose to Live Abroad

A large number of federal employees are retiring as the baby boomers near or reach retirement age. But, while living abroad may be attractive to some for a variety of reasons, learn how your income may be impacted by taxes before you make a decision to move.

For example, your Social Security income is taxed when you are living abroad just as if you were continuing to live in the United States. “Retirees who file individual tax returns and earn between $25,000 and $34,000 may have to pay taxes on up to 50 percent of benefits. Retirees with income over $34,000 may have to pay taxes on 85 percent of benefits. Retirees who file a joint tax return and have a combined income of between $32,000 and $44,000 may have to pay taxes on 50 percent of their benefits” according to one firm with an expertise in this arena. Retirees may also find that they owe taxes in their new country of residence. You may also find that you taxes on your federal annuity even when living overseas are treated just the same as your Social Security income.

Thorough research is a wise course of action before you pack up and move. You should check with a tax attorney familiar with U.S. tax requirements and also find out what taxes you may be facing in a new country of residence before you make a move that could be more expensive that you have anticipated. The monstrous tax system we live with in the United States is open to differing interpretations by tax experts because it is so unwieldy, complex, breathtaking in its size and scope, and full of contradictions and loopholes and traps. While moving abroad may make your tax headaches less painful, and renouncing your U.S. citizenship may enable you to avoid dealing with the invasive tax monster we have created, getting to that less painful point will take time and effort–especially if you have accumulated substantial assets that governments hungry for more revenue would like to take extract for their own purposes before you leave or after you arrive in your new location.

Welcome to the Global Economy

In a global economy, numerous factors impact where a person chooses to live. Patriotism certainly plays a role but, as we have seen here and in other countries, freedom and the ability to become financially successful and to keep most of the money earned as a result of that success is also important. Our tax laws are based, in part, on assuming that many people want to move to the United States and very few want to leave. As our economic freedom drops down in the world rankings, taxes go up and government spending takes a larger bite out of our economy each year, it becomes more attractive for some Americans to move to countries that offer a more attractive tax climate and less government regulation.

The U.S. has dropped from third in the world in terms of our economic freedom a few years ago to 18th in the world in 2012.

While the number of Americans renouncing their citizenship is still small,  the trend is growing in the direction of some of our most prosperous citizens leaving—and taking their assets and at least some of the jobs and prosperity they have created along with them.

© 2014 FedSmith Inc. All rights reserved. This copyrighted article may not be reproduced without express written consent of FedSmith Inc.

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About the Author (  |   )

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletter and a co-founder of two companies and several newsletters concerning federal human resources.

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