The top few percent of taxpayers already contribute the vast majority of personal income tax revenue, and the top tax rate, 35%, is scheduled to rise to 39.6% in 2011, when tax cuts from a decade ago expire. New legislation could target even more of your income, and recession-battered states and municipalities are also eyeing higher rates, particularly for the wealthiest residents. It’s enough to make you feel like getting the heck out of Dodge—perhaps emigrating to Switzerland or to one of the Caribbean nations that offer incentives to attract American millionaires. But before you pull up stakes for good, consider all of the implications, some of which have nothing to do with taxes. The benefits for expatriates may not be as promising as you expect.
To avoid paying U.S. taxes, it’s not enough simply to leave the country; you’ll also have to renounce your U.S. citizenship through a formal declaration of renunciation to the U.S. State Department. That’s a major step you might come to regret. Once you voluntarily renounce your citizenship, it won’t be easy to reacquire it if you change your mind, and as a non-citizen, you’ll no longer be able to seek help from the U.S. Embassy if you run into trouble abroad. And moving out of the U.S. is likely to involve a dramatic change in lifestyle, culture, and customs. (If you do decide to make the change, be sure to acquire citizenship in another country before you give up your U.S. citizenship. Otherwise, you may not be able to travel freely.)
 Meanwhile, leaving the country may bring fewer tax advantages than it did a few years ago. Changes included in a 2008 tax law for military personnel—the Heroes Earnings Assistance and Tax Relief Act (known as HEART, or the Heroes Act)—have diluted the savings wealthy expatriates might otherwise realize from leaving the country. Now, if you terminate your U.S. citizenship, you’re generally treated as if you had sold all of your assets on the day before expatriation, and you’ll owe taxes on those implied proceeds. This rule normally applies to anyone who meets one of the following three criteria (though people with dual citizenship in the U.S. and another country as well as those who relinquish U.S. citizenship before age 18½ may be exempt).
- During the five-year period preceding expatriation, you had an average annual U.S. tax liability of at least $145,000. That cut-off, which applies for those who give up their citizenship in 2010, is indexed annually for inflation.
- Your net worth is at least $2 million.
- You fail to certify that you have satisfied all applicable U.S. obligations during the five years before expatriation.
If you are subject to this tax on expatriates, you’re allowed an exemption of $626,000 in 2010 (the amount is indexed annually). Then you’ll be taxed at a 35% rate for ordinary income and 15% for long-term capital gains. Considering that these levies apply to all of your assets, minus the exempt amount, the tax is likely to add up to a hefty penalty for leaving the country and could undercut future benefits.
And what if you later want to do something for family members back home? U.S. citizens and residents who receive gifts or bequests from expatriates may be assessed a special transfer tax of 45%. The tax applies to property directly or indirectly acquired as a gift from someone who is an expatriate at the time of the transfer, as well as to any property received, directly or indirectly, due to the death of an expatriate. However, the transfer tax may be reduced by foreign gift or estate taxes paid on the property.
 Special rules also apply to deferred compensation (such as retirement plan benefits) that you receive after giving up your citizenship. In most cases, 30% of those payments must be withheld to cover U.S. income tax liability.
Finally, there could also be problems involving state taxes. In California, for example, expatriates may owe state tax on real estate they continue to hold in the state.
No matter how frustrating you find your current U.S. tax burden—and regardless of how much that burden may soon rise—choosing to emigrate and give up your citizenship isn’t a move to make without carefully considering all that it could mean. If you’re seriously thinking about leaving the country, we can help you understand how that change will affect your financial and personal circumstances and may be able to suggest less drastic measures that might also reduce your taxes. |