Since 1990, I have assisted literally hundreds of HNW Americans in deciding whether they should take the steps to legally and properly leave the US tax system by either renouncing their US citizenship or giving up their Resident Alien status. This is a complex decision which involves facing all of the issues that immigrants throughout history have had to grapple with. These include overcoming “life inertia” (for those still living in the US); loyalty to their home country; and concerns about being able to visit their former home in the future.
This involves looking at your current US tax burden and then calculating what your future US tax burden would be post-expatriation. Then multiple this annual US tax savings against the number of years remaining in your life. For more realism you also have to include in your current US tax burden the estate tax burden. Death is an event certain…with an uncertain event date.
This calculation is always going to be an approximation as you do not know the following:
a) What is going to be your future income and capital gains? (Assume that it will stay the same as last year?);
c) What will be your future US tax burden? (Note: You need to make the HUGE assumption that your tax burden will not increase in the future as an aging population meets entitlement programs?).
Your own interpretation as to whether the US tax savings will be greater or lesser will depend upon:
i) Whether you believe your income/capital gain will increase in the future;
ii) Whether you believe you are likely to outlive the average because of your healthy lifestyle; and
iii) Your view of reasonable expectations of politicians on tax policy over the remainder of your life.
Step 2) Determine the one-time cost of losing your US tax liability through renunciation:
iv) has the liquid financial resources to acquire a citizenship by investment; (NOTE: Here is the first of a three part series of blogs that I wrote on the topic);
B) Cost of payment of capital gains aka “Exit Tax” (Note: This only applies if you are a Covered Expatriate);
C) Cost of overcoming life inertia and moving personal and business life out of the US and into another jurisdiction(s); and
D) The cost of renouncing your US citizenship: This figure will include professional fees, government fee for Renunciation of citizenship and filing your IRS 8854 and terminal tax return.
After completing this financial analysis, an individual can determine whether expatriation is a suitable strategy for them to consider. For many of the wealthiest people in the US, the financial analysis makes a compelling argument to consider expatriation. Realization of this is what is driving the ever increasing numbers of expatriations.
Considering the ‘cost of failure’ to expatriate appropriately, it is a no-brainer that one should seek proper legal and accounting advice at every step.
Step 4: Compare the tax savings to the benefits of US citizenship (i.e. living full-time, voting, passing US citizenship onto children). Setting aside blind patriotism for a moment and looking at practical issues, the value that one places on retaining US citizenship depends greatly upon their position in life.
Here are three different examples:
i) 24 Year Old US citizen graduating with a Masters of Computer Science or Finance.
Unmarried and childless: Given that this person is at the start of their career, they would probably place a great emphasis on the value of their uninhibited ability to work (at least in the beginning of their career) in these fields in the US. Undoubtedly, employment opportunities are significant. They may also want to be able to pass on US citizenship to their future children;
2) 64 Year Old Canadian Citizen who was born in the US but moved to Canada when a young child:
This person is continually weighing the value of being in the US for business versus the on-going and future (estate) tax liability. This person may not be ready to expatriate at this time, but is prudently getting a Back Up Plan in place to allow them to execute a renunciation if and when they deem appropriate for them.
What the US (and the voters left behind) should remember is that it is FACT that the top 1% of US taxpayers contribute over 1/3rd of the total US personal tax take Whether you think it ‘fair or not’, there is NO DOUBT that this is a highly unstable revenue model. There only needs to be a tiny number of Golden Geese leaving the US tax system for there to be an ENORMOUS Asymmetric loss in tax dollars that are needed to run the US government and provide entitlement programs .