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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.
Ultimately each individual has to makes the final decision on their own. However there are some practical issues those contemplating expatriation should consider. Over these almost 3 decades, I have developed the following thought process:
Step 1) Try to get an approximation of your future US tax savings:
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:
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:
This involves determining the following:
Cost of new citizenship: This will vary widely depending on whether the person:
- 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.
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.
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:
1) 24 Year Old US citizen graduating with a Masters of Computer Science or Finance.
Here are three different examples:
1) 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 would essentially think of themselves as primarily Canadian. Their career and child rearing life periods are over. They may view the future avoidance of on-going compliance and hassle of remaining a US taxpayer in the Foreign Account Tax Compliance Act era to be worth more than retaining a US citizenship;
3) 45 Year Old High Net Worth Individual Venture Capitalist:
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 .
It is reasonable to surmise that US politicians will continue to respond to this exponentially growing number of expatriations with the same negative reinforcement that they have always tried . The inevitable result will be even more of an increase in the financial cost of expatriation the longer a Golden Goose hesitates. The other inevitable result will be an even faster acceleration of the number of wealthy Americans who will leave the US tax system before the cost of departure grows yet again. Even increasingly common discussion of “Tax the Rich Proposals” have driven the trend for Wealthy Americans to “Be Prepared” by creating a Back-Up Plan.
