Time to give up US citizenship?
Cross Border Planning
James McEvoy's picture

Many Americans and green card holders living abroad are finding it more and more difficult to keep up with the changes on IRS rules and regulations that effect their lives.  The implementation of FATCA (Foreign Account Tax Compliance Act) has in some cases forced Americans to close out bank accounts or limited what they can hold and invest in with non-US banks and insurance companies.  Couple this with increasing complexity in filing mandatory US tax returns and reporting requirements have lead some to ask the question;  is it time to give up US citizenship?

The answer to that question depends on individual circumstances.  For those who have never lived in the United States, have no assets or family ties there or any other emotional connections, there could be valid reasons to consider expatriation.  The steps to do so first require an individual to be current on US tax filings.  Many times this can be the initial stumbling block that needs to be addressed.  Working with professional tax preparers is necessary for those attempting to come back into compliance.  These professionals should be familiar with overseas issues and should maintain professional designations (i.e. CPA, Enrolled Agent, etc.).  Once tax filings are in order, the remaining process is relatively straightforward to complete the expatriation.

The one exception are for those individuals who have a net worth of $2,000,000 or more or an average tax bill of $151,000 or greater for the past 5 years.  They could face an exit tax on unrealized income in order to complete an expatriation.  To get a sense of the volume of people giving up US citizenship; in 2008 the figure was 235 and now in 2011 it has grown to 1780.  This may seem a lot but when you consider there are well over 5 million Americans living outside the United States, the figure is relatively small.

One thing Americans should avoid in trying to deal with their overseas planning is to pursue complex and questionable solutions.  Offshore schemes can many times create tax nightmares when they are challenged by the IRS and those who sell them can not or will not attempt to defend them to the IRS. Most of these scheme are “listed transactions” that must be disclosed to the IRS and carry crippling penalties for those who do not comply, intentionally or by ignorance.

Finally, for the rest of us who would like to maintain US citizenship and have a manageable financial life abroad, this can be accomplished.  The best way again is to seek the ongoing advise of a US tax professional who can file annual US tax returns, report overseas accounts and keep you current on the ever changing rules.  They can also be key to identifying opportunities in your planning.  For instance, appropriate asset allocation between US and nonresident alien spouse may be the key to a successful financial plan.

In summary, it is possible for Americans to live abroad and enjoy their lives in spite of the unique challenges posed by their US citizenship.  Besides, the pride in being a US citizen, think of the shorter immigration lines that you have to deal with at O’Hare and JFK airports!

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