The “Expatriation Tax Evader” Myth: The claim that people who give up their US citizenship (expatriate) are wealthy tax evaders trying to avoid paying their fair share to the government is a persistent myth. The case of Facebook co-founder Eduardo Saverin is a prime example of how this narrative is often inaccurate.
The Saverin Case
When Saverin expatriated, the media widely reported that he had saved at least $67 million in federal income taxes. However, this figure is simply not true. In reality, Saverin had to pay a significant “exit tax” on the increase in value of his Facebook stock when he gave up his US citizenship. Estimates suggest he paid over $350 million in exit taxes just on the gains from his Facebook shares. This hardly sounds like a tax savings of $67 million.
While it’s true that the future appreciation of Saverin’s Facebook shares after expatriation was not subject to US taxes, this income could still be taxed in another country. There’s even a possibility that Saverin could end up paying tax twice on the same gains, since the US exit tax is not coordinated with the tax laws of other nations.
The Consequences of Misinformation
Unfortunately, the media’s portrayal of Saverin as a wealthy “jetsetter” trying to avoid taxes has had real consequences. He became an easy target for populist outrage, despite the fact that the narrative around his expatriation was largely inaccurate.
In summary, the “expatriation tax evader” myth is just that – a myth. While there may be some individuals who expatriate for tax reasons, the case of Eduardo Saverin demonstrates how this narrative can be misleading and inaccurate. It’s important to look beyond the sensationalized headlines and examine the facts before drawing conclusions about someone’s motivations for giving up their US citizenship.
Expatriation Examples from Our Consulting Practice
- One client who had lived in Switzerland for more than 40 years gave up her US citizenship only after all of the banks she dealt with there closed her accounts. They didn’t want to deal with all the reporting requirements the US requires if they accept US account-holders. It’s easier just to fire their American customers.
- Another client living abroad was told that she couldn’t sign up for health insurance, because she was a US citizen.
- Another client was forced to sell his interest in a foreign business, because his non-US partners didn’t want its financial details released to the IRS.
- A US citizen living in Canada discovered to her horror that a tax-deferred account she had set up for a disabled family member wasn’t tax-deferred for US tax purposes. She expatriated only after receiving a bill for thousands of dollars from the IRS for income that, under Canadian law, was tax deferred. (Not to mention Canada is hardly a “tax haven.”)
You can find more detailed real-life expatriation examples here.
5 Expatriation Reasons: Why Nestmann Clients Expatriate
Expatriation is a radical step. So why bother?
We count at least five reasons to consider this step. This is especially true if you’re one of the over nine million Americans who live full-time in another country.
1) Duplicate tax obligations. The United States is one of only two countries that impose income tax on its citizens on their worldwide income if they live in another country. Eritrea, a totalitarian dictatorship, is the other one. Complying with US tax rules is hard enough if you’re living in the United States. But if you’re living in another country, you must now file two sets of tax forms each year. In most cases, you can credit the taxes you pay in your adopted country against your US obligations. But this is time-consuming and expensive to file two sets of tax forms each year.
2) Onerous reporting obligations. The first effort by Congress to require companies and individuals to disclose the assets they held internationally was in 1960. Subsequent laws decreed in 1962, 1970, 1976, 1986, 1996, 1997, 1998, 2005, 2010, and 2011 expanded reporting obligations and increased penalties for noncompliance. With each successive enactment, a growing network of uncoordinated reporting obligations and draconian penalties came into existence. The resulting hodgepodge is difficult even for international tax specialists to navigate. And it’s not just tax forms with which you need to be concerned although it’s those forms that are best known. For instance, if you’re enrolled in a non-US retirement plan, the odds are you need to report that plan as a foreign trust. That’s hardly an intuitive conclusion.
What’s more, the penalties for violating these reporting rules are draconian. For instance, failing to properly report a foreign trust can result in the IRS requiring you to fork over 35% of its value – in this case 35% of your foreign retirement assets. Expatriation is the only way to permanently end these reporting obligations and the penalties that accompany them.
3) Inability to maintain financial accounts anywhere in the world. Laws like the infamous Foreign Account Tax Compliance Act (FATCA) have made it difficult for Americans living abroad to carry on the most basic financial and business relationships in their adopted countries. FATCA, for instance, forces foreign financial institutions to follow US tax and reporting rules with respect to their US clients. If these institutions fail to do so, they face a 30% withholding tax on many types of US source income and other capital transfers. In many cases, it’s easier to “fire” US clients than deal with this risk. As a result, Americans living abroad report their financial accounts being closed. We’ve also heard reports of Americans abroad being denied mortgages and even insurance coverage.
What’s more, as part of ongoing “de-risking” strategies, US financial institutions are increasingly closing accounts of Americans living abroad. Thus, they’re finding it difficult to obtain financial services anywhere in the world.
4) Inability to work or conduct business. Another challenge to Americans abroad is getting a job or forming a business. One client’s employer told him he’d be fired unless he gave up US citizenship within 30 days, due to the employer’s correct perception that the client’s position as a company officer would require the client to disclose confidential information about the company to the IRS and Treasury. For the same reason, it’s increasingly difficult for US citizens or permanent residents to enter into business relationships with foreign persons or companies. They (the foreigners) simply view Uncle Sam as an uninvited and unwanted intruder into the relationship.
5) Inability to have a normal retirement. Most countries offer bona-fide residents the opportunity to make tax-advantaged contributions to retirement plans; schemes similar in concept to an IRA or solo 401(k) in the United States. But with only a few exceptions, the IRS considers the buildup in value in a non-US retirement plan to be taxable. That means retirees pay taxes twice on the same income; once when it’s generated within the plan (by the United States) and a second time when the income is distributed (by the country offering the plan). In high-tax countries like Canada, the effective tax rate in this income can exceed 70%.
8 Reasons Why Nestmann Clients Don’t Expatriate
There are some definite downsides to expatriation.
Here’s a list of eight practical reasons why you might not want to expatriate.
1) You’re only living abroad temporarily. Many multinational companies temporarily post their employees abroad. And while those employees may face some of the difficulties we alluded to elsewhere in this section (e.g., maintaining banking relationships), these problems will be resolved once they return to the United States.
2) You live and work abroad but think you might want to eventually return to the United States. Even if you see yourself as permanently living outside the United States, if you think you might want to return, expatriation is not a good option.
3) You don’t qualify for a second citizenship and passport. To avoid statelessness, you should get a second citizenship and passport before you expatriate. But if you’ve ever been convicted of a felony or are on any kind of sanctions list maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC), you might not be able to qualify for one. There are some workarounds we’ve helped clients with. But it’s much easier to qualify for a second citizenship and passport without these challenges.
4) Most of your income comes from US sources that can’t be shifted abroad. If you live in a country without a tax treaty with the United States and have US source income, you could be worse off tax-wise expatriating than if you remained a US citizen . For instance, if you receive pension and Social Security income from the United States, filing tax as a US citizen means you’ll have the opportunity to take a standard deduction and other deductions, minimizing your tax burden. But after expatriation, these sources of income will be subject to mandatory withholding taxes: 25.5% on your Social Security payments; 30% on your pension. You might be able to credit this tax against the tax liability in your adopted home country, but make sure you can before you expatriate. Otherwise, you could end up paying thousands of dollars more in tax each year as a non-citizen than you do as a citizen.
5) You don’t think you’ll qualify for a visitor’s visa to return to the United States if you expatriate. Obtaining a US visitor’s visa after expatriation can be a challenge. That’s especially true if you’re a wealthy (or relatively wealthy) “covered expatriate.” But if you remain a US citizen, you can always re-enter the country on your US passport.
6) Most of your income comes from a military pension. Most payments from military pensions end if you expatriate. An exception may apply if you receive a pension due to service in the military as a civilian. but be certain to check with a lawyer who understands the military pension system before you decide to expatriate.
7) You don’t feel a need to expatriate. We have plenty of clients who are content with their lives as US citizens permanently living abroad. They’ve set down roots and don’t suffer from the hardships from which Americans living outside the United States often experience.
8) The foreign earned income exclusion (FEIE) or the tax incentives in Puerto Rico provide a satisfactory alternative to expatriation. Under the right circumstances, these alternatives could substantially reduce your tax liabilities.
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Need Help?
We can assist in every phase of giving up your US citizenship or long-term residence. This includes helping you get a second passport before giving up US citizenship.
And if you’re not ready to expatriate, we can help you take advantage of tax breaks in the Tax Code that apply to U.S. citizens and permanent residents living overseas.
Schedule a free no-obligation consultation with a Nestmann Associate to see if expatriation is right for you.
How to Move Out of the US Permanently… From Start to Finish.
Thinking about saying goodbye to Uncle Sam? Here’s everything you need to know about expatriation. The good. The bad. And the often unspoken.
Learn more here: How to move out of the US.
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