In the thirty years I’ve been advising high net worth Americans I have heard the same question time and time again – ‘Should I Expatriate from the US?’. I assisted these individuals in deciding whether they should take the steps to legally and properly leave the US tax system. Some by renouncing their US citizenship and others through giving up their Resident Alien status. Here I examine how this decision may be tackled.
Expatriating from the US 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.
Step 1) Try to get an approximation of your future US tax savings:
This calculation is always going to be an approximation as you do not know the following:
- What is going to be your future income and capital gains? (Assume that it will stay the same as last year?);
- How long will you live? (Do you assume you live the average age?);
- 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: Whether you believe your income/capital gain will increase in the future; Whether you believe you are likely to outlive the average because of your healthy lifestyle; and 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:
- already has another citizenship;
- has a claim to another citizenship through descent or religion (Aliyah);
- has the ability to wait until they can acquire citizenship through naturalization ; or
- 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);
Cost of payment of capital gains aka “Exit Tax” (Note: This only applies if you are a Covered Expatriate);
Cost of overcoming life inertia and moving personal and business life out of the US and into another jurisdiction(s); and
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.
Step 3: Compare the cost of expatriation to the future US tax savings.
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
Here are three different examples:
1) 24 Year Old US citizen graduating with a Masters of Computer Science or Finance.
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 .