Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules

http://online.wsj.com/articles/more-expatriate-americans-break-up-with-uncle-sam-to-escape-tax-rules-1402972439

by kevin818 • 12 years ago

45 79 12 years ago

online.wsj.com

philiphodgen13• 12 years ago

I was quoted in this article. I do lots and lots of this work -- helping people log out of the USA cleanly and permanently. AMA.

deciplex7• 12 years ago

After you give up your citizenship you are still required to file with the IRS for the following ten years, correct? (Assuming you ever want to enter the US again.) What are your tax obligations during that time, though?

philiphodgen13• 12 years ago

After you give up citizenship you file a tax return for that year.

After that you only file income tax returns if you have income from US sources or you become a US resident.

The 10 year rule was repealed in 2008.

nickthemagicman• 12 years ago

Im very interested in this. Which countries are best for expats from a quality of life and ease of obtaining citizenship standpoint?

hingisundhorsa• 12 years ago

I believe that's Singapore. Albeit, the rules are being changed due to rapid influx of rich foreigners into Singapore causing social issues. https://sg.news.yahoo.com/ferrari-crash-fuels-singapore-anti...

philiphodgen13• 12 years ago

You have to solve two problems -- your place of citizenship and your place of residence. Dominica and St. Kitts are the two places most people look to buy citizenship. There are other more expensive places too.

Residence - this is easier to arrange. If the country will give you a tourist visa you're in, at least temporarily.

seanmcdirmid• 12 years ago

If you have lots of money, you can buy citizenship and a sweet tax deal from one of Switzerland's municipalities/cantons.

maaku4• 12 years ago

Two separate issues there :)

magamiako2• 12 years ago

I've been strongly considering expatriating, either to Canada or even more exotic locations such as Dubai/UAE. I have no real intentions of breaking from the US as a citizen, but perhaps you could clarify for me.

1. I've heard that under a certain tax bracket this does not happen. Is that true? 2. I hear Canada will actually let you write off taxes you've paid to the US.

anigbrowl• 12 years ago

How often does the WSJ ask you for a quote on this issue? I ask because they seem to run this same story every 6 months or so.

philiphodgen13• 12 years ago

The news cycle for this topic is quarterly since the government releases statistics on that time cycle. That's why you see the topic written about fairly frequently.

I talk to journalists all the time. I try to be helpful in some times they thank me by putting a quote in the article. Sometimes not.

clamprecht3• 12 years ago

Here's something I've been wondering, totally hypothetical but could be real for someone else:

Puerto Rico has this new tax law that basically limits taxes to like 4% or less, if you are a resident of PR. Let's say Bob is an American who expects to have a big exit in 2015 (or he has lots of GOOG stock and wants to sell it). Normally Bob would pay US capital gains taxes (15-20%, maybe 23.8%), plus California taxes (assuming he lives in CA). Instead, Bob moves to Puerto Rico, establishes residency. Then he sells his shares for US dollars, and pays Puerto Rico taxes. Then Bob moves back to mainland US, having saved lots of money.

Is there a flaw in the above situation?

scrumper2• 12 years ago

US citizens overseas are required to declare all income (and capital gains) to the IRS regardless of source. They still have to file returns in the US. Bob will owe tax as a result, but he can probably write off the 4% he payed in PR against his US taxes. He's not a resident of California, so he likely avoids the state tax.

(Note: I don't know specifically about Puerto Rico, but generally the above is the case for US citizens in foreign countries.)

gopi• 12 years ago

In this case Bob would pay IRS 20% tax for the price appreciation happened when he lived in CA. The 4% tax applies only to the price gain during his stay in Puerto rico.

rincon04045• 12 years ago

Yes, the flaw in the above scenario is that for capital gains that have a cost basis that began prior to becoming resident in Puerto Rico ("built in gains"), you will owe taxes at both the US federal and Puerto Rican levels.

3 scenarios:

If the business was started and sold prior to becoming a Puerto Rican resident, then taxes would be owed at US federal and state levels like normal.

If the business was started while resident on US mainland and then you moved and became resident in Puerto Rico (the OP's scenario), it gets a lot more complicated. Just considering capital gains from a sale of the business to keep it easier, you will owe taxes to both the US and Puerto Rico. These are called "built in" capital gains. You can look up details on this, but taxes are owed to the US and to Puerto Rico at rates that change over time depending on how many years you are resident in Puerto Rico before selling the business. This is the most complicated scenario.

If you start a qualifying Puerto Rican business after becoming resident in Puerto Rico and after having been accepted into Act 22, then you would start with a zero cost basis. This is the best case scenario. When you sell this business, you could owe 0% capital gains. However, during the lifetime of this business, you will still pay FICA taxes (15.3%) on earned income to the US Federal government up to the regular cut off levels, personal Puerto Rican earned income taxes on a portion of your income, and 4% corporate tax on business income. This is the easiest scenario since it starts with a zero cost basis.

Btw, IANAL.

TLDR 1.) Started & sold business in Cali, no capital gains tax benefit. 2.) Started business in Cali and sold after becoming resident in PR, crazy complicated, but taxes do apply at both federal and puerto rican level. 3.) Built and sold business in PR after acceptance into Act 22, and after becoming resident in PR, 0% capital gains tax, but other taxes apply during the lifetime of the business.

For those interested, residency is 183 days per year.

judk4• 12 years ago

Since a lot of us are thinking it: How do you justify you career as a morally acceptable calling?

hyperbovine• 12 years ago

Do you cure cancer or save orphans for a living? If not, how do you justify yours?

patio11• 12 years ago

Taxes pay for government services, which the citizenry of the United States broadly speaking wants, though they quibble every 4 years about the relative mix and funding levels. Tax laws are complex, highly technical, and require application of a voluminous body of rules to the infinite variety of potential fact patterns.

Many citizens, particularly those who have complicated fact patterns in their personal lives, are not capable of calculating their own taxes or would prefer to avoid doing so. Tax accountants and attorneys assist citizens in their obligations to calculate and pay the taxes required by the law, without paying more than they are obligated to pay.

I have a great accountant. (Hiya Cameron. waves) He sherpas me through my increasingly complicated international tax situation every year, which will never include renouncing my US citizenship but does often include such scintillating topics as "Does the US Revenue Code consider Japanese Self-Employment tax to be an income tax or not? If it does, should my income tax return for 2013 reference Japanese self-employment tax paid in 2013 or accrued in 2013? Is it most to my advantage to treat that as a necessary expense incurred by my business or as a deductible foreign tax or in some other fashion defined by the US-Japan Tax Treaty?" I pay Cameron so that I don't have to spend a week figuring that out, and can instead ship software, write emails, and otherwise move the business forward.

Bluestrike2• 12 years ago

Really? Would you care to elaborate on your position, as it seems a touch sophomoric.

We're talking about American expats who permanently live abroad, do not utilize taxpayer-funded services, and aren't planning on returning home. Hell, they aren't even utilizing what one might call the privilege of American citizenship. From the government's perspective, there's really no difference between an expat and a corpse (excluding the IRS, naturally).

In that context, how can choosing to renounce their citizenship be considered immoral? Particularly when that citizenship comes with the rather significant problems that are the result of a federal tax code that taxes overseas income for taxpayers abroad whose income will never see the United States (nor, for that matter, will the taxpayer). If we're going to argue about ethical codes, how do you taxing worldwide income and the onerous penalties that disproportionately affect the lower quintiles?

ximeng• 12 years ago

"The IRS fined him more than $172,000, roughly eight times his back taxes" - this also seems to require some justification.

onetimeusename• 12 years ago

A few questions if you don't mind. Do you know if any of your clients who have renounced citizenship have had trouble coming back in to the United States to visit friends or family or for business? Is it common for countries to tax personal income if it was earned overseas and the expatriate lives where the income was earned? Does the US do that? Has the IRS taken any interest in the contacts of your clients who are citizens? Finally, have any of your clients regretted the decision?

philiphodgen13• 12 years ago

No one has had any problems returning to the USA.

The USA is the only country that taxes its citizens who live outside the country. I think that's what you're asking. British citizens living abroad don't pay UK income tax.

The IRS hasn't taken any interest in my clients -- the tax returns are clean and that's all they should care about. But the Lois Lerner affair shows that they are corrupt, unfortunately.

The people I know who give up citizenship almost all do it with extreme regret. I assume this feeling persists even after the fact.

throwawayyyy• 12 years ago

This is probably not the right forum to approach you in, but is there any chance you would be able to take a few questions from me either here or by e-mail? I am a dual citizen (but I have never lived in the country) and am so afraid of doing something wrong with regards to US tax obligations. I am especially worried that I would accidentally make myself liable by simply owning my home or having a savings account in my native country.

I realize your job is to handle these things, and I am not in any way trying to say "can you please answer some questions for free so I don't have to hire you later on" - I'm just a regular guy with a regular income and a regular life in another country who happens to have been born to a US citizen a long time ago. I cannot in any way afford to consult with an international tax attorney.

Feel free to ignore this random stranger asking for advice using a throwaway account :-)

deciplex7• 12 years ago

"U.S. citizenship is the most coveted citizenship in the world. To give it up, it has to be pretty serious,"

It's pretty serious to give up your birth citizenship no matter where you're from. But, as someone with American citizenship, this doesn't ring particularly true for me. There are a number of passports I would trade, today, right now, for the one I currently hold. Anyone claiming American citizenship is the most coveted in the world is saying a lot more about themselves than they are the US.

magamiako2• 12 years ago

Quite a few people I know would prefer to travel on an American passport because it offers less hassle than most other passports. We have fewer VISA requirements, etc.

We have somewhat shot ourselves in the foot here or there since we tightened travel restrictions on some countries. But it's still an incredibly good passport to have for traveling.

DenisM• 12 years ago

magamiako, your account is hell-banned.

maaku4• 12 years ago

How do you see hell-banned posts?

jessriedel4• 12 years ago

What countries's citizenships would you suppose is coveted by more people worldwide than the US?

LammyL• 12 years ago

canada?

adamnemecek• 12 years ago

switzerland?

WildUtah• 12 years ago

Any EU citizenship is more useful and less dangerous and more lucrative and more flexible and subjects you to less world-wide paperwork, tax, and business restrictions.

So Estonia, Poland, Romania, Bulgaria, Slovenia (or is it Slovakia?), Lithuania, Latvia, Slovakia (or Slovenia?), and Greece have more valuable passports for their citizens.

If you travel a lot in East Asia, Japan's passport is awfully useful and has much nicer perks than US citizenship.

Obviously, France, Britain, Canada, Germany, Italy, Sweden, and other core wealthy nations have much, much better deals for citizens, too.

The US passport and citizenship is more and more like a third world quality passport every year, with one major exception. That exception, of course, is the right to live in the USA, which is a dang nice country with excellent open country, parks, forests, space to breathe free, big highways, fishing, hunting, the right to keep and bear arms, and fine honest people.

But if you don't love this land, you're better off with Latverian or Hungarian or Freedonian citizenship, because our politicians have done squat to keep our citizenship valuable around the world.

patmcguire• 12 years ago

The first world ones are all pretty much equivalent in terms of getting you around, one or two countries difference with no Visa among the top, not sure where the discrepancies are...

http://www.ibtimes.com/best-passports-have-unrestricted-trav...

US citizenship means you have tax liability on income overseas and dealing with a few weird things like the Cuba embargo, but you're also a citizen of the most powerful nation on earth, which does matter if you get stuck in a revolution or something.

judk4• 12 years ago

It's just WSJ rah rah blind patriotism and running interference for moneyed interests.

Obviously USA has a lot more to offer a plantation worker in Honduras than a wealthy retiree who might need some medical care.

jmadsen2• 12 years ago

I wish the title of the article better reflected the real point - explained in the article itself - instead of saying "escape tax rules", with all the implications

The fact is, more and more of us with solid middle-class incomes and perfectly normal lives are becoming increasingly concerned about laws that are poorly explained and advertised to us, but with huge potential penalties if we go unaware of them. These are exclusive to people living in other countries - if they imposed some of these on non-expatriates, there would be a riot.

It is becoming a very stressful burden.

philiphodgen13• 12 years ago

The paperwork burden caused by poorly known and viciously complex tax rules is probably the first reason people give me for cancelling citizenship. Especially since the US government seems hellbent on imposing astonishingly large penalties for paperwork failures.

The risk is too large for middle class people.

The second tax reason people give is the estate tax.

electromagnetic• 12 years ago

A family friend ran into this. She lived in Canada nearly all her working life and only heard about having to file paperwork with the US when it was being announced there was going to be a crackdown due to the recession.

Fortunately between her and her husband they had enough money to get a good lawyer and get it sorted out before they tried to nail her for all the tax she owed.

I think the biggest issue with the "tax by citizenship" is that it turns US citizenship into a commodity to be traded for personal benefit.

It's noble to try to chase the tax dodgers, but it's a lot more practical to tax the people who stay and ensure anybody who wants to flee is going to be losing sizeable amounts of their property.

Canada has investment rules based on nationality/citizenship and the owners of those shares can't just elope and expect to keep their controlling interests. In fact most of the big companies that face these rules have their foreign investments near maximum, so that anyone fleeing would be forced to sell all their stake and selling a big stake of any company means selling at a sizeable loss.

judk4• 12 years ago

Why does WSJ (and NYT) add extra words to make headlines more awkward?

Is WSJ really trying to argue that expats are dodging tax rules, not taxes?

morgante• 12 years ago

Is WSJ really trying to argue that expats ate dodging tax rules, not taxes?

Actually, yes. Maybe you didn't read the story, but it specifically talks about how the major burden for middle class expats isn't necessarily taxes but the penalties for failing to file specific paperwork.

Anecdotally, this is certainly true for the expats I know (including myself). I didn't have to pay any US taxes, but the penalty for not filing excessive disclosure forms on all local bank accounts is very onerous.

philiphodgen13• 12 years ago

This is exactly right. HNers who are US citizens will set up a perfectly ordinary corporation in their country of residence and run their company perfectly legally in that country. Years later they hear of Form 5471. The government's SOP on this is to impose a $10,000 per year penalty then force you to beg for the penalty to be removed. Sometimes that happens. Sometimes that doesn't. How many small businesses could stand a $40,000 or $50,000 hit just because you didn't file a piece of paper saying you owned stock in a foreign corporation?

Rapzid• 12 years ago

The greatest part is that now most of these banks are required by law to report our accounts to the IRS. So now that the IRS is notified we no longer have to worry about penalties right? Wrong. Now they have an automated way to detect and fine us.

ebiester• 12 years ago

It's really pretty bad. We're not even talking about the wealthy in many cases. You basically have to have an tax preparer who specializes in expat issues handle your taxes, and they aren't cheap. This is not a job for H&R Block.

nikdaheratik• 12 years ago

It depends on how much money you earn and where you live, mainly. If you make < 100k a year U.S. and pay taxes on it in the country you live in, you can get by with a 1040 and one or two extra forms as far as the IRS goes, and not have to pay the U.S. anything in income taxes.

However, the issue with the WSJ article, where you would also have to disclose retirement and savings accounts or pay a penalty can be an unpleasant surprise for people. Makes me want to just put everything in my spouse's name and pretend the U.S. government doesn't exist.

thefreeman• 12 years ago

Any non paywalled link?

Edit: http://pastebin.com/TrTF32uw

rincon04045• 12 years ago

The US needs to adopt a residency based tax system like the rest of the world.

This would solve so many problems.

The main issue why this remains a problem is that Congress doesn't care about American citizens who live abroad. Congress knows they can abuse Americans who will never comprise a large enough portion of any district for their votes to really matter. This is why people are actually renouncing. They have no other practical solution or representation.

rincon04045• 12 years ago

isaacbrocksociety.ca

This link needs to be here. If you're an American abroad suffering similar treatment, you can find support with these people who are in the same situation. They are trying to help end the US's unfair CBT citizenship based taxation and switch to RBT residency based taxation like the rest of the world already uses.

Expatriate Americans Break Up With Uncle Sam to Escape Tax Rules

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