Why Are An Ever Increasing Number of American Citizens Relinquishing Their Citizenship?

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The number of people who have renounced their citizenship in the first quarter of 2019—the most recently reported quarter—according to the U.S. Treasury. When Donald J. Trump was elected president in 2016, some people, many of them Democrats, talked about renouncing their United States citizenship and moving abroad as a political protest. But now, a different group of Americans say they are considering leaving — people of both parties who would be hit by the wealth tax proposed by two senators seeking to oppose Mr. Trump in his race for re-election, Elizabeth Warren and Bernie Sanders. Immigration lawyers said the numbers would be higher if embassies had the staff to accommodate the volume of requests. David Lesperance, a Canadian immigration lawyer living in Poland who specializes in helping American citizens expatriate, said many embassies around the world had backlogs in making appointments.

In somber language, Section 349(a)(5) of the Immigration and Nationality Act details a U.S. citizen’s right to renounce his or her citizenship by voluntarily “making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State,” and by signing an oath of renunciation. 

The Process and the Impact of Expatriation

Abandoning citizenship has serious consequences: You give up the benefits granted to U.S. citizens, including the right to vote in U.S. elections, government protection, and assistance while traveling overseas, citizenship for children born abroad, access to federal jobs, and unrestricted travel into and out of the country. 

What’s more, renunciation is not as easy as throwing out your passport. It’s a lengthy legal process that involves paperwork, interviews, and money. Because of the increase in the number of U.S. citizens seeking renunciation, the U.S. Department of State raised the fee for renunciation from $450 to $2,350, more than 20 times the average cost in other high-income countries. In addition, some high-income citizens may owe a type of capital gains tax called an “exit tax” (officially called an expatriation tax). 

It’s important to recognize that in nearly all cases, a renunciation is an irrevocable act, meaning you won’t be able to change your mind and regain U.S. citizenship. Despite these (and other) consequences, more and more people are choosing to renounce their U.S. citizenship.

Why So Many Renunciations?

The IRS warns there are “serious penalties for not reporting these financial assets.” It should be noted theFATCA requirements are in addition to Form 114, Report of Foreign Bank and Financial Accounts (FBAR), the long-standing requirement for reporting foreign financial accounts. The penalties for failing to comply are significant, and, in some cases, involve criminal liability.

While the reasons for abandoning citizenship vary from one person to the next, the recent spike in numbers is largely due to newer tax laws, including the Foreign Account Tax Compliance Act (FATCA) of 2010. According to the IRS, FATCA is “an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore.” FATCA focuses on reporting by:

In addition to financial reporting requirements is the issue of double taxation. Unlike most countries, the U.S. has citizen-based taxation, meaning citizens are taxed regardless of where in the world they live and where they earned their income. While foreign tax credits can reduce the tax burden, they do not eliminate all double taxes, particularly for higher-income earners, who end up filing and paying taxes both in the U.S. and abroad.

The current tax laws – and the reporting, filing and tax obligations that accompany them – have made many Americans choose to renounce their citizenship, not just because of the money, but because they find the tax compliance and disclosure laws inconvenient, onerous and even unfair.

One other side effect of FATCA – and the requirement for foreign financial institutions to report information to the U.S. regarding U.S. citizens’ accounts – is that many foreign banks don’t want to deal with American clients at all. As a result, many U.S. citizens have been turned away by financial institutions abroad, a frustrating problem if you live overseas and want to pay your bills.

Other Reasons for Renunciation

Historically, Americans have occasionally renounced their citizenship for other reasons. For example, opposition to U.S. policy during the Vietnam War. Certain acts can also cause an individual to lose U.S. citizenship without formally renouncing it. Under the Internal Revenue Code and/or the Immigration and Nationality Act (found in Title 8 of the United States Code), citizenship can be terminated (and therefore relinquished, not renounced) for several reasons, including:

Historically, the bulk of expatriates fell into two categories: older, wealthy people hoping to save on taxes and the “accidental Americans,” who were born in the United States but lived and worked abroad or who were born abroad but lived in the United States long enough to come under the Internal Revenue Service’s taxing authority.

Now many inquiries are also coming from younger entrepreneurs upset about the political situation in the United States and from people who want to operate their businesses overseas and not be subject to American financial reporting requirements.

“That younger person is also thinking of it as impact citizenship, like impact investing,” Mr. Jafri said. “They don’t want to be American. They’re not happy with how we’re perceived overseas.”

There are also businesspeople who either don’t want to be subject to I.R.S. scrutiny or believe that the annual Report of Foreign Bank and Financial Accounts has become too time-consuming or costly.

“I’ve never seen this before,” Mr. Jafri said. “People used to say, ‘If so-and-so becomes president, I’m moving to Canada.’ Well, no one did.”

But now, the price may be right to leave. While the cost of expatriating varies depending on a person’s assets, the wealthiest are betting that if a Democrat wins next year, leaving now means a lower exit tax. For anyone with assets below $2 million or an average salary over five years of about $165,000, there is no exit tax. For everyone else, the exit is calculated on a person’s assets, as if they were sold on the day of expatriation. Someone with a portfolio of appreciated stock, for example, would be taxed at the capital gains rate.

The Bottom Line

Today, tax laws are resulting in record numbers of people renouncing their U.S. citizenship each year. But it’s not as easy as putting your passport through the shredder. Because the law states that those wishing to renounce their U.S. citizenship must do so in person before a U.S. consular or diplomatic officer while in a foreign country, U.S. citizens cannot renounce their citizenship by mail, through a third party or while in the United States. 

Renunciation has significant consequences. Aside from giving up the benefits granted to U.S. citizens, the U.S. Department of State advises that anyone considering renunciation of their U.S. citizenship should understand that, in almost all cases, the act is irrevocable. An exception: A person who renounces his or her citizenship before the age of 18 can have that citizenship reinstated by notifying the Department of State within six months of turning 18.

Renouncing one’s citizenship is one of the most solemn decisions anyone can make. Carefully weigh the pros and cons for yourself and your family. It is also recommended that you consult with an experienced tax professional to understand the tax consequences of renunciation.

So people leave their country of origin for various reasons, but it is evident that more and more people are becoming spooked about Democratic run government. Where taxes will be sky high, and economic growth will be stifled. People are simply leaving America to save money. The vast majority of them anyway. If Biden wins, I am thinking I will leave too, but I won’t renounce my citizenship as long as I receive my Social Security that is. If the federal retirement system collapses, I will probably renounce it as well. These are sad times, I love America, but there is no way I will live here if we become a socialist/communist country.

Investopedia “Why People Renounce Their U.S. Citizenship”, by Jean Folger served as the primary source, with other sites serving as support sources.

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