If you're a U.S. citizen or permanent resident, the U.S. government has assigned itself the right to tax your income, no matter where you live. I sometimes tell U.S. clients that even if they jumped in the Starship Enterprise and traveled to the Delta Quadrant (30,000 light years away from earth at its closest point), they would still be subject to U.S. tax!
In response to the ridiculous—but unfortunately very real—presumption that U.S. citizens must pay income tax wherever they live, an increasing number of U.S. citizens are giving up their U.S. nationality. Yes, it's a big step, and it means you no longer have the legal rights and privileges of a U.S. citizen. You can't vote, for instance, and you no longer have the automatic right to live in the United States. But this process of expatriation is the only way U.S. citizens can permanently sever the obligation to pay tax on non-U.S. income.
However, there are also a number of myths—many of them propagated over the Internet—about expatriation. I'll be discussing these myths—and debunking them—in one of my presentations at The Sovereign Society's upcoming Offshore Advantage Academy event in Cabo San Lucas, Nov. 3-6, 2010.
Here's a preview:
Myth #1: "Only a tiny number of people expatriate each year."
It's true: the "official" number of people who take this admittedly radical step is tiny—only a few hundred annually. The Treasury Department is supposed to publish their names in the Federal Register each quarter. But the real numbers are much higher.
One especially busy U.S. consulate in Switzerland expatriates three people daily with appointments booked a year in advance. That comes to close to 1,000 expatriations annually—just from a single consulate.
Another reason the official numbers are so low may be that the law mandating Federal Register reporting by the Treasury Department applies only to "covered expatriates." These are individuals who have a net worth over $2 million, or who meet other criteria making them potentially subject to an exit tax. However, none of the covered expatriates my firm has helped expatriate has had their name published in the Federal Register.
I think the government doesn't want you to know that the number of people expatriating is exploding. And it's willing to "cook the books" to make sure the information doesn't get out.
Myth #2: "You have to pay an exit tax on your net worth when you expatriate"
I was at a dinner meeting a few months ago where I was introduced to an elderly gentleman who insisted that anyone who expatriated would automatically forfeit 15% of his or her net worth.
When I asked him for a legal citation to this "fact," he simply repeated his assertion. He also mentioned that he was a major contributor to the organization sponsoring the event we were attending. That no doubt earned him some brownie points at this organization, but it doesn't make his assertion correct.
The fact is that the exit tax now imposed on U.S. expatriates only applies if you're a covered expatriate. And even if you are, the exit tax only applies to unrealized gains that exceed $627,000.
There's no exit tax on your net worth simply because you've expatriated. Of course, that may change in the years ahead if Congress decides to put the screws to expatriates in some future law.
Myth #3: "You can only spend 30 days/year in the USA."
Another misconception is that if you expatriate you can only spend 30 days each year in the United States without becoming subject to U.S. tax on your worldwide income.
This myth actually has some basis in fact, because it was true under an old law that was abolished in 2008. And it still applies if you expatriated between 2004 and 2008. But no longer. Now expatriates are treated the same as any other non-resident alien (NRA). In general, a non-resident alien can spend an average of 120 days/year in the USA without becoming subject to tax on his or her worldwide income. This period can be extended in some circumstances.
Myth #4: "If you expatriate you can't come back."
There's another rumor that once you expatriate you can never return to the United States. That's hogwash, although again there's a small basis in fact to the rumor.
In 1996, Congress enacted the so-called Reed amendment to the Immigration and Nationality Act. The amendment gives the Attorney General the discretion to deny entry into the United States to a former U.S. citizen who renounced U.S. citizenship in order to avoid U.S. taxation.
Other categories of "excluded persons" are those with communicable diseases or other health conditions; those convicted of crimes involving moral turpitude or illegal drugs or with multiple criminal convictions; prostitutes; spies; terrorists; and draft evaders.
After Congress enacted the Reed Amendment, commentators criticized it for violating US treaties and possibly the US Constitution as well. And nearly 15 years after its original enactment, regulations under this provision have not been issued, and its power has never officially been invoked.
"Tax motivation" is no longer a factor in determining the status of a covered expatriate. For this reason, the Reed Amendment may no longer be relevant, particularly since it has been so long since its enactment, with no regulations in place to enforce it.
Given this history, it may be safe to assume that one can safely give up U.S. citizenship with no fear of future exclusion, particularly if you choose an expatriation option other than formal renunciation.
Myth #5: "Expatriates lose Social Security benefits"
Again…not true! No restrictions exist on Social Security payments sent to non-citizens in most cases. The only significant restrictions are if you live in a country upon which the U.S. government has imposed trade or financial restrictions; e.g., Cuba, North Korea, or Iran.
However, if you're not a U.S. citizen, depending on where you live, there may be a withholding tax of as much as 30% on the first 85% of your monthly payment. This percentage may be reduced or eliminated if there's a tax treaty between the United States and your residence country.
Myth #6: "Expatriates are automatically targeted for reprisals by the IRS"
Thank goodness this myth is false. There is no IRS vendetta against expatriates. Quite the opposite! The IRS has much easier pickings going after people still living in the United States, with substantial U.S. assets. It can use its resources more efficiently than to harass former U.S. citizens not living in the United States and with minimal or no U.S. assets or activities.
Indeed the act of expatriation stops the clock on all future IRS obligations. You still have obligations to pay past taxes, but the statute of limitations for collections eventually runs out assuming you've filed all relevant returns for tax years prior to expatriation.
Is Expatriation for You?
Exploding expatriation myths is just one part of the presentation I'll be making on this topic in Cabo San Lucas.I'll also be discussing:
You won't want to miss it. For more information on this event, click here:
See you in Cabo!
Copyright © 2010 by Mark Nestmann
P.S. To learn more about expatriation, check out my BILLIONAIRE'S LOOPHOLE report in the bookstore on my Web site, http://www.nestmann.com.
In response to the ridiculous—but unfortunately very real—presumption that U.S. citizens must pay income tax wherever they live, an increasing number of U.S. citizens are giving up their U.S. nationality. Yes, it's a big step, and it means you no longer have the legal rights and privileges of a U.S. citizen. You can't vote, for instance, and you no longer have the automatic right to live in the United States. But this process of expatriation is the only way U.S. citizens can permanently sever the obligation to pay tax on non-U.S. income.
However, there are also a number of myths—many of them propagated over the Internet—about expatriation. I'll be discussing these myths—and debunking them—in one of my presentations at The Sovereign Society's upcoming Offshore Advantage Academy event in Cabo San Lucas, Nov. 3-6, 2010.
Here's a preview:
Myth #1: "Only a tiny number of people expatriate each year."
It's true: the "official" number of people who take this admittedly radical step is tiny—only a few hundred annually. The Treasury Department is supposed to publish their names in the Federal Register each quarter. But the real numbers are much higher.
One especially busy U.S. consulate in Switzerland expatriates three people daily with appointments booked a year in advance. That comes to close to 1,000 expatriations annually—just from a single consulate.
Another reason the official numbers are so low may be that the law mandating Federal Register reporting by the Treasury Department applies only to "covered expatriates." These are individuals who have a net worth over $2 million, or who meet other criteria making them potentially subject to an exit tax. However, none of the covered expatriates my firm has helped expatriate has had their name published in the Federal Register.
I think the government doesn't want you to know that the number of people expatriating is exploding. And it's willing to "cook the books" to make sure the information doesn't get out.
Myth #2: "You have to pay an exit tax on your net worth when you expatriate"
I was at a dinner meeting a few months ago where I was introduced to an elderly gentleman who insisted that anyone who expatriated would automatically forfeit 15% of his or her net worth.
When I asked him for a legal citation to this "fact," he simply repeated his assertion. He also mentioned that he was a major contributor to the organization sponsoring the event we were attending. That no doubt earned him some brownie points at this organization, but it doesn't make his assertion correct.
The fact is that the exit tax now imposed on U.S. expatriates only applies if you're a covered expatriate. And even if you are, the exit tax only applies to unrealized gains that exceed $627,000.
There's no exit tax on your net worth simply because you've expatriated. Of course, that may change in the years ahead if Congress decides to put the screws to expatriates in some future law.
Myth #3: "You can only spend 30 days/year in the USA."
Another misconception is that if you expatriate you can only spend 30 days each year in the United States without becoming subject to U.S. tax on your worldwide income.
This myth actually has some basis in fact, because it was true under an old law that was abolished in 2008. And it still applies if you expatriated between 2004 and 2008. But no longer. Now expatriates are treated the same as any other non-resident alien (NRA). In general, a non-resident alien can spend an average of 120 days/year in the USA without becoming subject to tax on his or her worldwide income. This period can be extended in some circumstances.
Myth #4: "If you expatriate you can't come back."
There's another rumor that once you expatriate you can never return to the United States. That's hogwash, although again there's a small basis in fact to the rumor.
In 1996, Congress enacted the so-called Reed amendment to the Immigration and Nationality Act. The amendment gives the Attorney General the discretion to deny entry into the United States to a former U.S. citizen who renounced U.S. citizenship in order to avoid U.S. taxation.
Other categories of "excluded persons" are those with communicable diseases or other health conditions; those convicted of crimes involving moral turpitude or illegal drugs or with multiple criminal convictions; prostitutes; spies; terrorists; and draft evaders.
After Congress enacted the Reed Amendment, commentators criticized it for violating US treaties and possibly the US Constitution as well. And nearly 15 years after its original enactment, regulations under this provision have not been issued, and its power has never officially been invoked.
"Tax motivation" is no longer a factor in determining the status of a covered expatriate. For this reason, the Reed Amendment may no longer be relevant, particularly since it has been so long since its enactment, with no regulations in place to enforce it.
Given this history, it may be safe to assume that one can safely give up U.S. citizenship with no fear of future exclusion, particularly if you choose an expatriation option other than formal renunciation.
Myth #5: "Expatriates lose Social Security benefits"
Again…not true! No restrictions exist on Social Security payments sent to non-citizens in most cases. The only significant restrictions are if you live in a country upon which the U.S. government has imposed trade or financial restrictions; e.g., Cuba, North Korea, or Iran.
However, if you're not a U.S. citizen, depending on where you live, there may be a withholding tax of as much as 30% on the first 85% of your monthly payment. This percentage may be reduced or eliminated if there's a tax treaty between the United States and your residence country.
Myth #6: "Expatriates are automatically targeted for reprisals by the IRS"
Thank goodness this myth is false. There is no IRS vendetta against expatriates. Quite the opposite! The IRS has much easier pickings going after people still living in the United States, with substantial U.S. assets. It can use its resources more efficiently than to harass former U.S. citizens not living in the United States and with minimal or no U.S. assets or activities.
Indeed the act of expatriation stops the clock on all future IRS obligations. You still have obligations to pay past taxes, but the statute of limitations for collections eventually runs out assuming you've filed all relevant returns for tax years prior to expatriation.
Is Expatriation for You?
Exploding expatriation myths is just one part of the presentation I'll be making on this topic in Cabo San Lucas.I'll also be discussing:
- The best options for second citizenship and passport for prospective expatriates
- How to size up an offshore jurisdiction as a prospective low-tax residential haven.
- Tax planning for prospective expatriates with family members remaining in the United States…
You won't want to miss it. For more information on this event, click here:
See you in Cabo!
Copyright © 2010 by Mark Nestmann
P.S. To learn more about expatriation, check out my BILLIONAIRE'S LOOPHOLE report in the bookstore on my Web site, http://www.nestmann.com.
Mark--Reed was enacted 25 years ago, not 15 years ago. Get with it, dude. Great article--one of your best.
Posted by: Jack Cohen | July 24, 2010 at 04:37 AM
On what grounds does the State Dept deny expatriation? Could a federal student loan be an obstacle?
Posted by: Dave | July 24, 2010 at 06:39 AM
Dave - you ask a very important question!
US Passport rules snag child support cash!
Now that millions of additional travelers need passports to fly back from Mexico, Canada, the Caribbean and South America, collections under the Passport Denial Program are on pace to about double this year, federal officials told The Associated Press
Passport Denial Program: http://www.acf.hhs.gov/programs/cse/newhire/fop/passport.htm
Posted by: Cesare Bonventre | August 07, 2010 at 06:00 PM