The first quarter of 2015 saw the highest number of US citizens ever renounce their citizenship mainly due to the exhaustive tax regime employed by the US government. As a result, the US is set to record more citizenship renunciations in 2015 than in any prior year.
In 2013, 2,999 Americans renounced their citizenship, an increase of 221% from 2012, while in 2014, 3,415 renounced their citizenship, the highest total ever.
Experts believe that the year 2015 will break all records and will see up to 5,000 Americans giving up their citizenship.
An online survey conducted by a Hong Kong-based consultancy revealed that 23% of respondents were “seriously considering” renouncing US citizenship. Experts believe that this trend is unhealthy for the US economy as most of the people who are giving up their US citizenship are rich.
The process of formal renunciation of American citizenship is complex and requires the person to be physically present at a US embassy or consulate outside the US, where the citizenship can surrender in the presence of an American official.
The main reason behind more and more people renouncing US citizenship is to save money by avoiding taxation.
“The Internal Revenue Code requires each American citizen to report and pay taxes on all worldwide income, even if the individual does not live in the United States and did not earn any income from sources within the country,” explains a tax lawyer from Los Angeles. “US citizens living abroad must also report and pay taxes to their countries of residence.”
These rules make the American passport expensive for many Americans living abroad, who would prefer the option of utilising the lower tax rates of the countries they are residing in.
In addition, American citizens living outside the US are legally required to adhere to extensive US reporting requirements on international bank accounts. In fact many foreign banks do not allow US citizens to open accounts as they find these requirements too arduous.
“Failure to report foreign accounts can lead to criminal prosecution and penalties of up to 50% of the account balance for each year that the account was open,” says the tax lawyer. “In some cases, the penalties can exceed the amounts held in the account.”
But not all Americans living abroad are giving up their citizenship as the US levies an exit tax – a tax that is levied on anybody who wishes to renounce American citizenship.
“For purposes of the exit tax, a US citizen is deemed to have sold his assets the day before expatriation. The hypothetical sales proceeds are then subject to U.S. capital gains tax. This tax was put in place to severely limit the tax benefits of leaving the country,” says Paul Jacobs of Palisades Hudson Financial Group.
Moreover, the US passport remains a very attractive passport, ranking among the top five most powerful passports in the world along with Sweden, United Kingdom, Finland, and Germany. A US passport allows its holder to travel visa-free to 174 countries, a much higher number than offered by passports of most other countries.
After careful evaluation of the advantages and disadvantages of US citizenship, many Americans eventually do change their minds about renouncing US citizenship. But among the 1% wealthy expatriates, the option is slowly gaining more popularity than ever.
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