IS GIVING UP ONE’S U.S. CITIZENSHIP TO SAVE ON TAXES A SMART MOVE?

In 2011 1780 American citizens signed the sobering oath renouncing U.S.citizenship before a U.S.diplomatic representative abroad.  This number is up from 226 in 2088, 731 in 2009 and 1485 in 2010. Those who renounce hold dual passports and thus have citizenship in another country and will not become persons without a country.  Some do so because they have become disenchanted with life in theU.S.A.and want to return home.  More recently the steep increase in renunciations has been attributed to the crack down by IRS on offshore tax havens and unreported foreign bank accounts.  Some do so simply to save large U.S.tax bucks on their worldwide income, because almost all other countries tax only locally sourced income of citizens.

Two recent cases have received widespread publicity.  Denise Rich gave up her U.S.passport to return to Austria which also taxes its citizens on world-wide income but offers generous tax breaks to its citizens who spend half of the year abroad.  Rich is said to have been motivated by a desire to live closer to her family in Austria and to her long time companion.  But, she could have accomplished these goals without surrendering her U.S.citizenship.

Also taking the plunge to renounce was Facebook co-founder Eduardo Saverin who was born in Brazil, moved to the U.S.in 1992 and became aU.S.citizen in 1998.  He renounced deciding to move to Singapore.  The step was timed to precede the Facebook IPO which had been expected to largely increase the value of his shares that would have been taxed by theU.S.long arm tax framework.

My colleague tax lawyers claim that both Rich and Saverin will definitely reduce their tax burden by the move.  That may be true but that calculation assumes that the tax framework, rates and structure in the two countries will remain the same over the long run so as to create a tax benefit that offsets the U.S. exit tax that can hit hard those with net worth exceeding $2 million; or, with average annual net income tax  for the five years ending on the date of expatriation exceeding $151,000 for 2012 expats (the amount is annually adjusted for inflation); or, who fail to certify on Form 8854 that they have complied with all U.S. federal tax obligations for the five years preceding the date of expatriation. (See Internal Revenue Code Section 877A).  This is sort of like the Roth IRA conversion analysis.  One pays an up front tax for an expected future benefit.  But, the future is exceeding obscure.

Beyond tax computational considerations, I have reservations about the wisdom of surrendering the security of a U.S.passport to save some money, even lots of money.  Most of those renouncing are extremely wealthy.  The tax paid or saved will not change their lifestyle. Not having the U.S. passport as a safe haven could in the future turn out to be a huge mistake, a risk, much more serious than tax rates or burdensome disclosures.  Only 60 years ago, the world was engulfed in the turmoil of WW II.  The wealthy were not immune from the horrors of invasion by German and Japanese armies. People now assume that we shall never again experience such a world conflagration.  That assumption is no better than assuming we will not suffer another devastating hurricane or tsunami or catastrophic nuclear accident.  The world today is less stable than a few years ago.  Even staid Europe is racked with financial crisis. China’s economic goals conflict with Western interests on many fronts.  Territorial disagreements on the Asian and North Polar seas are rising. Germany is tiring of paying for Southern Europe’s high fine time.  The Balkans is yet simmering while Russia, having invaded Georgia is pressing its ambition to restore its empire, as the Middle East moves towards greater instability and possible nuclear war.  Financial and territorial crises often lead to military crises.  No amount of money will buy what peaceful sleep a U.S.passport guarantees if the not too distant past does repeat itself. 

Everything we do involves trading one risk for another.  If we are smart we avoid the risks we cannot afford to have happen.  For the wealthy tax rates are a terrible annoyance but they are not by and large a game changer.  The wealthy are not destroyed by taxes. Celebrities are more likely to spend themselves into poverty than to be taxed into poverty.  My advice: avoid outlier risks, not likely to happen, that will destroy you if they do.   Keep your U.S.passport or one day you may rue your decision to surrender it.

 © 2012 by Robert S. Steinberg, Enquire
All rights reserved

This entry was posted in TAX and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s