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Dump citizenship to avoid taxes?

By Kay Bell ·
Thursday, May 3, 2012
Posted: 5 pm ET

The tax advantages of moving abroad have gotten a lot of attention recently, thanks mostly to the New York Times' report of how tech giant Apple uses foreign offices to help lower its U.S. tax bill.

But it works for individuals, too.

Data from the Treasury Department show nearly 1,800 Americans renounced their citizenship last year. That's a record number since the Internal Revenue Service began publishing in 1998 lists of persons who relinquished their citizenship.

And many who have decided over the years to forsake American citizenship have done so to avoid U.S. taxes.

Unlike most countries, the United States taxes the income of citizens and resident aliens regardless of where it's earned. Not does this worldwide taxation system raise financial issues, dealing with how U.S. taxes are collected while you live in another country is complicated.

In a December 2011 report to Congress, the National Taxpayer Advocate Nina E. Olson cited a World Bank report that examined the tax systems of 183 countries and ranked the United States 66th in the amount of time spent to comply with tax obligations and 62nd in the ease of paying taxes.

Much of the difficulty comes from deciphering tax treaties between the United States and other countries. Currently, the U.S. has tax treaties with around 40 countries that allow taxpayers to claim a credit for foreign taxes paid against their U.S. tax obligations.

"The complexity of international tax law, combined with the procedural burden on international taxpayers, creates an environment where honest taxpayers who are trying their best to comply simply cannot," wrote Olson. "For some, this means paying more U.S. tax than is legally required, while others may be subject to steep civil and criminal penalties. Some U.S. taxpayers abroad find the tax requirements so confusing and the burden of complying with them so great that they give up their U.S. citizenship."

Not many, but a key group

While 1,800 people are the proverbial drop in a bucket when it comes to overall U.S. population, the tax expatriate trend is troubling.

It's a safe bet that many in this group are high earners who would contribute to the U.S. tax base if they stayed in their home country.

Longer term, the fact that they are willing to relocate and surrender their history as Americans indicates that they are bold, just the type of citizens any country wants to keep to help contribute to its growth.

Dave Camp, the chair of the House Ways and Means Committee, has made no secret of the fact that he wants the tax-writing panel to explore ways to transform the corporate tax code from our current worldwide income system to a territorial one under which income earned by a U.S. corporation's foreign branch or subsidiary would, for the most part, be generally exempt from U.S. taxation.

But Congress shouldn't stop there. It needs to look at making the move to territorial taxation for individuals, too.

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May 08, 2012 at 4:09 pm

I can get dual citizenship with the UK but wouldn't I still be required to pay the US tax even if living in a Commonwealth country?

Mary Cleo
May 05, 2012 at 10:07 am

Mark, you can obtain second citizenship and become a dual national of US and of another country, but you only need to pay US exit tax, if you:
1) want to renouce US citizenship
2) and qualify for "exit tax" - have certain level of income and wealth

Mark Randall @ tax relief
May 04, 2012 at 2:07 pm

What would happen if you have dual citizenship? Would you still need to pay the exit tax?

Mary Cleo
May 04, 2012 at 8:04 am

Many thanks, Key. Indeed many US nationals consider give up their nationality to save on taxes. For some of them, in particular for wealthy nationals, it might be not that straight-forward to renounce. First, you need to obtain a second citizenship in another country, then you might need to pay a so-called "exit tax" that you are to pay before they let you go:
and of course, you need to relocate from US to another country "for good".