Are you thinking of moving to another country? Over the past decade, a record number of U.S. citizens have decided to live and work abroad. There are many issues you may not have considered that will impact any decision to become a U.S. expatriate. The European Union, through its official department “Eurostat,” has noted a nearly 30% increase in migration from the U.S. to the European Union alone in the past two years.
Are you attracted to a lower cost of living, a simplified lifestyle, beautiful countryside, or political stability in another country? You are not alone. However, as an international tax attorney with decades of experience, I can tell you that the decision to move out of the country triggers important legal and tax issues that you may not be aware of. What are the tax consequences of leaving the U.S., and what are a few things you should consider if you are considering it?
Inside Tip: Most U.S. taxpayers do not realize that the United States (and in fact many individual states such as California) tax income worldwide. Moving overseas or outside of the United States will not ease your tax burden. In fact, it will add several challenging tax-related issues one must be aware of and comply with.
It is important to understand that the United States taxes you based on your citizenship, not your physical location or residency. U.S. citizens who live and work in a foreign country must still file taxes with the IRS and submit state tax returns as well, including the FinCEN Form 114 or FBARs, and many associated informational forms.
If you become a U.S. expatriate, you are required to disclose every Foreign Financial Account (FFI), investment account, bank account, or cryptocurrency exchange wallet that altogether has had an aggregated balance of $10,000 or more (even for 5 minutes). Those who fail to disclose all offshore accounts, investments, and assets to FinCEN on an FBAR and to the IRS on Form 8938 each year face substantial taxation, penalties, interest, fines, and even the risk of criminal prosecution for tax evasion.
According to the U.S. State Department, almost 9 million Americans live abroad. Changes in international banking and finance due to FATCA have made things much more difficult for U.S. expatriates and U.S. citizens living and working abroad. Many have experienced closure of their bank accounts and denial of loans. U.S. expatriates and all U.S. taxpayers must file their returns with the IRS and their state of residence every year, regardless of their income. U.S. expats are exposed to significant taxes on amounts earned that are greater than the “Foreign Earned Income Exclusion” (IRS Form 2555).
Inside Tip: FATCA changed everything. Today, every offshore Foreign Financial Institution worldwide is required to provide specific information directly or indirectly to the IRS regarding the accounts and activities of U.S. taxpayers. The vast majority comply. This means the IRS receives electronic data on every U.S. citizen with any offshore financial account or business interest.
For individual U.S. taxpayers, the IRS receives a report containing your Social Security Number (SSN) or Taxpayer Identification Number (TIN), account number(s), balance information, disclosures of deposits and withdrawals, and your name and address.
If a U.S. taxpayer, including U.S. expatriates who live outside of the United States, and you have any interest in a business entity, the IRS is receiving electronic reporting disclosing your unique taxpayer identification (SSN or TIN), name and address, account numbers, income, dividends, interests and information about each business entity in which you hold even a minority interest. If a U.S. taxpayer is associated in any way with a business FFI account, the IRS will receive the name of the entity, entity TIN, and all transactional information associated with the account.
This informational reporting began more than 10 years ago, however, the agency did not have the resources to comb through the reams and reams of data to tie the information back to individual U.S. tax returns.
This has recently changed in a substantial manner. Those who are thinking of moving to another country must seriously consider the impact of the continuing obligation to file U.S. and state tax returns, regardless of where U.S. citizens reside worldwide.
The IRS has not only invested heavily in up-to-date technology and computer software and hardware, but the agency has also harnessed the power of Artificial intelligence (AI) to begin analyzing the extensive electronic reporting received from FFIs worldwide. AI simply needs to isolate all data associated with a US SSN or TIN and then compare it to recent tax returns, a simple task for AI.
If the information provided by the international financial institution(s) doesn’t match the information a U.S. taxpayer has provided on their FBAR submissions and U.S. tax returns, the taxpayer is easily flagged for investigation or an IRS Audit.
The reality is simple: The risk of draconian penalties, fines, back taxes, interest, and the genuine risk of criminal prosecution for tax evasion has substantially increased in the past year alone. There is no place to hide or a way to prevent the IRS from learning of your offshore accounts, activities, income, and assets.
If you are serious about leaving the country you may wish to consider changing your state of residence away from California. California has one of the highest tax rates in the nation, and unless you are ready to relinquish your passport and citizenship, you will still be required to file federal and state tax returns each year. You should investigate the process of changing your domicile to a state without income tax.
Are you thinking of moving to another country in search of a more affordable lifestyle or a change of scenery? If you don’t wish to continue to pay U.S. taxes, you must renounce your U.S. citizenship. The first thing to consider is the United States charges you to turn in your passport. That’s right, it will cost you $2,350 to turn in your passport. If you have a net worth greater than $2 Million or have earned more than $160,000 for the past five years, you may likely be subject to an “exit tax.”
This tax is calculated much like a capital gains tax, as if you sold all of your assets and received that cash on hand before leaving. The formula is quite complex, and it is still often more attractive to pay the exit tax and enjoy the benefit of ownership at a lower rate in the coming years. You must also certify to the IRS that you have satisfied all federal tax requirements for the five years before expatriation.
While most of the comments in the political arena, the news, and airwaves today are a bit bombastic, the realities of moving to another country are significant. The tax consequences of leaving the country are quite substantial for any U.S. taxpayer. You will need the advice and counsel of an experienced international tax attorney to review your unique circumstances. It is possible to prepare for this transition through transactional planning in order to protect your assets, minimize risk, and reduce the impact of taxation as you begin a new life outside of the United States.
Allen Barron serves the US expat community and those who are thinking of moving to another country and/or renouncing their US citizenship. We also support foreign nationals living and working in the United States. If you are considering relocation outside of the U.S., it is quite likely your decisions will result in complex tax-related consequences.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
