Integrity Legal

Posts Tagged ‘US Tax’

10th August 2013

Millions of people around the world wish to take up residence in the United States of America and often wish to become American Citizens. However, it would appear that some Americans are cutting ties with the USA and renouncing their United States Citizenship. Names of all those Americans who renounce their United States Citizenship are recorded and published in the United States Federal Register. These lists are generally not particularly newsworthy. However, in the most recent quarterly publication regarding US Citizenship renunciation it would appear that the number of Americans renouncing their United States Citizenship has jumped by over 60% when compared to previous quarters. In the last quarter 1,131 people renounced their United States Citizenship. This number is a large increase from the previous quarter which saw only 679 renunciation. Although, when compared against the same quarter of the previous year which saw only 188 renunciations the 1,811 figure is rather staggering. Is this simply a one-time anomaly or is this the sign of a growing trend?

While some are speculating as to what this trend means in a broad socio-economic context, I feel that some analysis is necessary to put some perspective on these numbers. A reader looking at the Federal Register’s official posting regarding these numbers will likely note the following information:

For purposes of this listing, long-term residents, as defined in section 877(e)(2), are treated as if they were citizens of the United States who lost citizenship.

The casual reader may wonder: what does this mean? Well to quote directly from the Cornell Law School’s website which lists sections 877 (e)(1) and 877(e)(2):

(1) In general

Any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701 (b)(6)) shall be treated for purposes of this section and sections 2107, 2501, and 6039G in the same manner as if such resident were a citizen of the United States who lost United States citizenship on the date of such cessation or commencement.

(2) Long-term resident

For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the event described in subparagraph (A) or (B) of paragraph (1) occurs. For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.

Therefore, based upon the information provided by the Federal Register and the United States statutes noted above some of those listed in the Federal Register as those renouncing their Citizenship could be United States Lawful Permanent Residents (colloquially referred to as “Green Card” holders) who have chosen to give up their permanent resident status. This explanation probably does not account for all of the “Citizenship renunciations” listed in the recent Federal Register publication, but it may account for some of these numbers. In any event, the number of those expatriating from the United States remains high compared to previous points in American history. The question remains, why are higher numbers of Americans renouncing their citizenship?

There are some who contend that the recent spike in citizenship renunciation may stem from American policy regarding taxation of United States Citizens living abroad. American Citizens (as well as lawful permanent residents) are taxed on their worldwide income, regardless of where they physically reside. This situation is in stark contrast to the tax policies of virtually every other country in the world as most countries only tax those of their citizenry who reside in their country. There are exceptions to the previous statement as issues such as domicile play into many countries’ foreign taxation policies. Many feel that the recent increases in the number of renunciations is driven by Americans with high foreign derived incomes seeking to rid themselves of the need to pay American taxes. In a major story from last year it was noted that one of the founders of Facebook had renounced his United States Citizenship before the IPO of that company’s stock. It should be noted that some argue that his tax obligations at that time may not have actually decreased as a result of his decision to give up his citizenship (due to American tax laws such as the so-called “Expatriation Tax” or “Exit Tax”), although his future tax liabilities may be reduced as a result of that decision. Perhaps more Americans are taking the (somewhat drastic) step of renouncing their citizenship in order to save some money from the tax man. Without knowing each former-American’s motivations for renouncing United States Citizenship we are left to speculate.

There may be another impetus behind the recent increase in the number of Americans renouncing their Citizenship: the FATCA. The Foreign Account Tax Compliance Act (FATCA) compels financial institutions outside of the United States to report information about accounts maintained by American Citizens or lawful permanent residents to the Internal Revenue Service. Furthermore, foreign financial institutions are also required to report on accounts maintained by foreign corporations in which Americans or Lawful Permanent Residents own a significant interest. The FATCA’s implementation has been pushed back until July of 2014. Could the looming specter of the FATCA be the reason for the recent uptick in American’s renouncing their citizenship? One of the many upshots of the FATCA is the fact that the regulatory requirements imposed by the American government on foreign banking and financial institutions can be rather burdensome. One way that these foreign institutions can relieve themselves of these burdens is by refusing to accept American customers. If there are no Americans holding accounts at a given foreign bank, then the bank does not necessarily have to comply with the provisions of the FATCA. This has lead to a situation where more and more overseas banks are refusing to provide services to Americans living and working abroad. By renouncing United States Citizenship and naturalizing to the Citizenship of another country a former American could bank in much the same manner as other foreign nationals.

The decision to renounce one’s U.S. Citizenship is a significant one and should not me made lightly. There are many benefits to being an American Citizen so those thinking of renouncing their Citizenship should review not only their tax situation, but also the intangible and tangible benefits of their American citizenship (including the US Passport). Will this trend continue? It remains to be seen, but there are many who feel that as American oversight of global taxation matters becomes more ubiquitous there will be more American’s who question the value of their citizenship.

–Benjamin W. Hart is an American attorney who resides in Bangkok, Thailand.

For related information please see: Citizenship Renunciation.

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5th February 2011

One of the Founding Fathers of the United States, and a true Renaissance man, Benjamin Franklin was once quoted as stating, “In this world nothing can be said to be certain, except death and taxes.” Truer words may never have been uttered as taxation and death seem as ubiquitous now as they likely did in the 1700′s. With that in mind, this blogger has recently noticed a great many American people outside of the USA who have misconceptions regarding the current state of American law with regard to taxation of Americans resident abroad. It would appear that there are those under the mistaken impression that individuals outside of the United States are not subject to American income tax. In fact, nothing could be further from the truth pursuant to current United States tax rules.

To quote directly from the official website of the Internal Revenue Service: IRS.gov:

If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.

As can be seen from the above quotation, Americans working or earning income abroad are still subject to American taxation regardless of the fact that they are physically located outside of the jurisdictional confines of the United States of America. There are many who do not agree with the current tax policies regarding individuals resident abroad, but as the law currently stands Americans must pay taxes even on income earned outside of the USA. That said, from a practical perspective there are some benefits accorded to Americans residents abroad. To quote further from the same page of the Internal Revenue Service website:

If you reside overseas, or are in the military on duty outside the U.S., you are allowed an automatic 2-month extension to file your return until June 15. However, any tax due must be paid by the original return due date (April 15) to avoid interest charges.

Of further note to Americans resident abroad is the foreign earned income exclusion which may allow Americans resident abroad to obtain a exemption from paying taxes on earned income up to a certain specified level. To quote directly from the Internal Revenue Service’s web page regarding the Foreign Earned Income Exclusion:

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is now adjusted for inflation ($91,400 for 2009, $91,500 for 2010, $92,900 for 2011). In addition, you can exclude or deduct certain foreign housing amounts.

It should be noted that “living abroad” should not be construed to mean short term periods of residence outside of the USA. In fact, one wishing to claim the aforementioned exclusion would likely be required to spend a substantial period of time outside of the USA. In fact, the IRS currently uses a Physical Presence Test in order to determine whether or not an American who has been abroad qualifies for the foreign earned income exclusion. To quote further from another page of the IRS.gov website:

You meet the physical presence test if you are physically present in a foreign country or countries 330 full days during a period of 12 consecutive months. The 330 qualifying days do not have to be consecutive. The physical presence test applies to both U.S. citizens and resident aliens.

This posting is merely intended to act as a primer for those interested in American tax issues and how United States tax rules impact Americans resident abroad. This posting should not be viewed as a complete or comprehensive analysis of an individual’s current tax situation. Those interested in obtaining advice regarding American tax matters are well advised to contact a licensed professional. At the time of this writing the Integrity Legal Network includes an American attorney licensed to practice law before the United States Tax Court.

For related information please see: Expat Tax Return.

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