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Did taxes cause record expatriations?

By Kay Bell ·
Thursday, February 13, 2014
Posted: 3 pm ET

The 2014 Winter Olympics are nearing the midpoint of competition and nationalism is at a peak globally, especially in the countries boasting medal winners.

In case you've lost count, the United States has 12 medals so far, including four gold.

Some recent U.S. residents, however, probably aren't cheering for athletes wearing the red, white and blue.  They've surrendered their U.S. citizenship or residency.

Record exits

The Treasury Department is required to publish a quarterly list of individuals who renounced their U.S. citizenship or terminated their long-term U.S. residency. During the last quarter of 2013, that list had 630 names.

That final 2013 Treasury report brings the total number of published expatriates last year to 2,999. That shatters the previous record high of 1,781 set in 2011 and is a 221 percent increase over the 2012 total of 932, according to Andrew Mitchel, an attorney in Centerbrook, Conn., who specializes in international law.

The Treasury reports don't say why the people they name leave -- only that they no longer are subject to U.S. laws.

Worldwide vs. territorial taxation

However, critics of the Internal Revenue Code in general and the United States' tax treatment of foreign income in particular are quick to link taxes to the record departure of citizens. That, like most conversations about taxes, is a bit extreme and not completely true.

Yes, the United States taxes its citizens on their worldwide income. No matter where they live, they must pay tax to Uncle Sam.

They also pay taxes in the country where they live and earned the money, and that duplication of taxation generally is taken care of via tax treaties with other nations.

Other nations, however, tend to rely on territorial tax systems. Within those borders, only income from a source inside the country is taxed.

Tax reform topic

In recent years, discussion of tax reform has examined shifting the U.S. worldwide tax system to a territorial-based tax.

This change is especially popular among multinational companies, which then would have to pay U.S. tax only on what they earn at home. It also would get rid of the complicated current tax structure involving foreign tax credits and global tax shelters.

As for individuals, when they surrender U.S. citizenship, they no longer have to hassle with the Internal Revenue Service. This could be particularly appealing to an American already living abroad.

Of course, those expatriating individuals get hit with an exit tax. That law was enacted in 2008, based on the presumption that rich people renounced their U.S. citizenship and moved overseas primarily for tax reasons.

But the truth for both companies and people is that taxes are just a part of the reason folks leave or move to other countries.

Still, the recent increase of folks permanently exiting the United States is definitely another reason to look at overhauling our tax system, especially in the area of foreign earnings.

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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and co-author of the e-book "Future Millionaires' Guidebook."

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