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Here’s one way to avoid taxes

By Judy Martel · Bankrate.com
Friday, November 19, 2010
Posted: 11 am ET

So just how much do the wealthy hate paying taxes? Unlike almost every other country, the U.S. levies taxes on its citizens no matter where they live in the world. So some of the more globally-minded wealthy are taking their expatriate status much further by renouncing U.S. citizenship.

Granted, the numbers are small, and many prefer to remain discreet, but some reports indicate that in the past few years the number of those taking this rather drastic step has been increasing. According to an article in the Financial Times this summer, three times as many Americans renounced their citizenship in 2009 compared with 2008.

 If you want to spend some quality time examining tax shelters and strategies for the wealthy, get set for a journey through labyrinthine tax laws. For my part, I turned to Bankrate's tax expert, Kay Bell, for answers.

Uncle Sam wants your income.

Uncle Sam wants your income.

"The biggest hassle for folks with global income, either from work or other sources, is that the U.S. tax system is global; that is, the IRS collects on a resident's worldwide income. Yes, there are tax treaties that help offset the U.S. tax when tax also is paid to another nation, but the concept is annoying and complicated. Most other countries tend to be more territorial in their taxation, collecting primarily on income earned within their borders. And under our tax system, even nonresidents face US. tax on income from certain sources within the country," according to Bell.

"Add to that the recent offshore income focus by the IRS. Yes, the agency just closed the books on the UBS situation, saying it got the names it wanted of Americans allegedly trying to shelter income in foreign accounts. But the IRS also is now beefing up its offshore account investigation unit."

 So with all that, those with means may be tempted to take a pass on the U.S. tax system, but of course, there's a catch. As Bell explains it: "Under provisions of Heroes Earnings Assistance and Relief Tax Act, or HEART Act (H.R. 6081), which became law in June 2008, if you renounce your residency and surrender your U.S. citizenship, you face an immediate tax on unrealized gains of most assets at current market rates. This includes the value of stock portfolios, real estate, art and most other types of assets.

"The idea was to make it so costly that some citizens or residents might decide against leaving the U.S., keeping them and their taxable income within the IRS's grasp. But obviously some folks still decide each year that the one-time hit is worth the overall lifetime savings."

In the end, it may not be just taxes that propel the wealthy out of the country. It's likely a lifestyle choice as well. After all, with millions of dollars at your disposal, a mansion on a small Caribbean island might provide little incentive to live in the U.S.

What do you think of the wealthy renouncing U.S. citizenship?

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Joe in Singapore
November 30, 2010 at 4:06 am

Steve, while you're intentions are good, and everything you said makes sense - the reality is, the people who have an incentive to renounce US citizenship are those who contribute the most to US tax revenue, revenue that is so badly needed in the programs you mention. Those with, at the very minimum, a 6-figure salary and 7-figure net worth. The people who rely on medicare and social security do not have the means nor the incentive to renounce their citizenship... they are not the ones paying through the nose to support everyone else. But when you can buy a nice home overseas just with one or two years worth of tax savings, who wouldn't consider doing so? However, the lost tax revenue could have provided for several people's benefits.

steve orr
November 21, 2010 at 6:50 pm

The more people we got off of Medicare the better. I hope more elderly people leave the US. By renouncing US citizenship one gives up Social Security and Medicare benefits - reducing the overburdened, overcommitted, unfunded entitlements.

The biggest problem in the US are the entitled elderly who think they are owed free retirement, free healthcare, free medication, no taxes and no commitments.

Take a walk sometime in Arlington National Cemetery. Countless lives have been spent protecting American freedom and what do people do? They smoke, drink, remain sedentary, eat the wrong foods and get fat. What happens next? Lots of illnesses that cost hundreds and hundreds of billions of dollars.

if we could get more people to pay for their own healthcare and not the government then people would make better lifestyle choices and if they don't, well maybe someone out there is willing to put their money where their mouth is and pay for overweight smokers who get heart disease. The government shouldn't.

Any schema to get more elderly people to leave the US would be great - we need more young people and less elderly.