There are a lot of stories in the news today about people who promised to leave the country based upon the outcome of the election. The fact is the number of Americans who renounce their citizenships each month has been rising steadily for the past several years. In 2015 approximately 4,300 Americans renounced their citizenships and left the country. So far in 2016, that number is up substantially. What are the tax consequences of leaving the country and what are a few things you should think about if you are considering it?
It is important to understand that the United States taxes you based upon your citizenship, not your physical location or residency. US citizens who live and work in a foreign country must still file taxes with the IRS including FBARs and associated forms, and submit state tax returns as well. According to the US State Department, almost 9 million Americans live abroad. Changes in international banking and finance due to FATCA have made things much more difficult for citizens living abroad and US expats. Many have experienced closure of their bank accounts and denial of loans. Yet they still must file their returns with the IRS and their state of residence and pay taxes on amounts earned which are greater than the “Foreign Earned Income Exclusion.”
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.
Still thinking of leaving the country? If you don’t wish to continue to pay taxes you must renounce your US 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 very likely may 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 had received that cash on hand prior to 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 years to come. You must also certify to the IRS that you have satisfied all federal tax requirements for the 5 years prior to expatriation.
While most of the comments in the news and on the airwaves today are a bit bombastic, the tax consequences of leaving the country are quite substantial. Allen Barron serves the US expat community and those who are considering renouncing their US citizenship to leave the country. We also support foreign nationals living and working in the United States. These situations result in complex tax scenarios, and we invite you to contact us for a free consultation at 866-631-3470.