Record number of US Expats Renounce Citizenship as New Tax Disclosure Laws Take Effect
By Emma Grasby
More than 3,000 former U.S citizens chose to renounce their U.S citizenship within the last year, with the dramatic rise being mostly attributable to new tax laws that are set to go into effect this year. The total number of renunciations has soared more than 1000% in the past 5 years, from just 231 in 2008.
The Foreign Account Tax Compliance Act (FATCA) was approved by congress in 2010, with the first phase of the act becoming law that year. That phase required all U.S expats to report on any foreign bank holdings worth more than $10,000, or any foreign assets worth $50,000, in addition to the cumbersome burden of having to file their taxes with the IRS in the first place (the U.S is one of only two countries in the world requiring expats to file taxes, Eritrea being the other).
The next phase of the act goes into effect on June 1, 2014, when all foreign banking institutions will be required to report to the IRS on the accounts of any U.S citizens. Banks have until April 25 to register with the IRS, as Canadian banks did earlier this month. There are approximately 1 million U.S citizens living in Canada according to the state department, more than any other country in the world save for Mexico.
Some foreign banks shutting out U.S citizens
Not only are the new laws set to be intrusive for U.S expats, they are equally so for foreign institutions, some of which are telling their U.S accounts holders to kindly take their money and scram. Numerous expats in Switzerland have had their accounts forcibly closed as a result of the new tax laws, which are prompting some banks there to avoid the hassle of dealing with U.S citizens altogether, an endeavor which could save larger institutions tens of millions of dollars annually according to the Swiss government. Those expats left without access to banking services as a result are left in the unenviable position of being unable to save for retirement, take out loans, or in some cases even rent apartments. It could also severely impair their ability to run a business or function as a self-employed citizen in those countries. However by giving up their U.S citizenship, they are also forfeiting their access to things like U.S health care, which could be particularly worrisome for those living abroad with pre-existing medical conditions, for whom global health and travel insurance would now be of the utmost importance.
Giving up green card could require exit tax
Wealthy U.S expats are not exempt from one final tax should they decide to renounce their citizenship. In most cases they’ll be subject to an exit tax on the value of their assets, as if they were all sold the day they left. This has prompted (at least speculatively) some U.S citizens to renounce their citizenship before their assets appreciated.
Facebook co-founder Eduardo Saverin was widely accused of this in 2012, when he renounced his citizenship just prior to Facebook’s IPO. The value of his stock was nearly $4 billion, and the renunciation saved him tens of millions of those dollars. The move was immediately met with criticism from some democrats, who sought to have a stronger exit tax put in place, though that bill has yet to be passed. Saverin denied he renounced for tax reasons, claiming the decision was made solely because he has lived and worked in Singapore for many years. Saverin did pay a standard exit tax of 15% on the pre-IPO value of his shares when he left.
Tax laws for expats could play role in 2016 election
FATCA has become so controversial that the promise of repealing it is seen as a potential swing topic for the 2016 federal election; something that the Republicans have announced they are trying to do. The expatriate vote has often gone to the Democratic party in full force, and a strong shift in that trend could influence who sits in the White House come 2016. Of course for those who have already renounced their citizenship because of FATCA, it is now too late to help vote at a chance for its ouster. Former U.S citizens renounce their voting rights along with their future tax obligations.