Thinking About Giving up Your U.S. Citizenship? Think Twice - By Alan Olsen CPA, Partner
Greenstein Rogoff Olsen & Co. LLP
You want to kick-back in the happy isles of Micronesia or in an ocean front casita in Mexico? Why is it so many of them will trade places with you in a heartbeat?
While not a lot of people ever entertain the thought of giving up their U.S. citizenship, there are more people every year that are making that choice. Among them are several wealthier people whose main reason for renouncing is to escape the country’s overloaded tax system; including extremely high tax rates for the wealthy and those who earn are big global earners.
The U.S. Doesn’t Want You to Leave
However, it would seem that maybe the United States isn’t too keen on the idea of people giving up their citizenship. In fact, it appears that the government has taken notice of the increasing number of people choosing to defect, and it has decided to do something about it. The State Department has recently raised the fee for U.S. citizens who want to renounce their citizenship from a mere $450 to $2,350. Compared to other countries, the U.S.’s fee is more than 25 times higher than the average level in other countries considered high-income.
Can You Come Back?
According to the State Department, the increase is due to all the extra work that is incurred when someone chooses to renounce his or her citizenship. In another twist, if you decide to leave, you might have a hard time getting back in, even just to visit. Bitcoin entrepreneur Roger Ver renounced his citizenship early in 2014, but when he tried to obtain a visa to visit the U.S. later in the year the U.S. embassy denied his request saying that he had not established sufficient ties to his new home in the Caribbean that would compel him to return after visiting the U.S. While his case might be exceptional, it does cause one to think twice about leaving.
Exit Tax Looms
There is also the issue of paying an exit tax. First, in order to leave the country for good, you have to prove that you have been tax compliant in the United States for the last 5 years. Also, if you happen to be wealthy then you have to pay an exit tax. So how is being wealthy determined? If you have a net worth of more than $2 million or your average yearly net income tax (not income) for the previous five years was $157,000 or more for 2014, then you will be subject to the exit tax.
Record Numbers Are Leaving
Despite the country’s efforts to dissuade American people from choosing to give up their citizenship, it appears that more and more people are choosing to take this route. As the IRS has made a heavier push on global tax reporting, including strongly pushing the Foreign Account Tax Compliance Act (FATCA), the list of those renouncing continues to climb. Plus, there are many who believe that not everyone who renounces even makes the list. In 2013 alone, the number of people who did make the official list jumped by 221 percent from 2012, which was a new record at the time.
Consider Your Options and Be Prepared
Giving up your citizenship is a big decision, and one that shouldn’t be made lightly.
I went the other route - As a blond haired, blue-eyed American born in Los Angeles California, I decided to become a Mexican in 2007. I had lived in Mexico and was married to a Mexicana for 7 years. If you marry a Mexican it normally takes 2 years before you can become nationalized, 6 yrs living there otherwise. I now have dual citizenship. There are advantages and disadvantages to that.
With a little tequila, the disadvantages seem to evaporate. You can vote in two countries. If you vote conservative in one country - and liberal in the other, the issues will even out. You can work in either country but you may not like the wage scale in Mexico. Best to own a business, sell real estate etc. in Mexico rather than work for peon wages. You get to wrestle with the tax man in two countries.
On the personal level, you get disrespected in two countries for being an immigrant or alien but you gain respect from immigration agents in both countries for always having the right passport. Learn Spanish and the policia in Mexico may cut you a little slack when they realize you are local. Best of all - you can poke fun at gringos and Mexicans and get away with it.
My friends from the US often say: WTF! "You moved to Mexico and became a Mexican?" "Though this be madness, yet there is method in it." - Shakespeare's Hamlet
Understand when the Americans settled Mexican Texas and California back in the early 1800's - the Mexicans gave (or sold cheap) the American immigrants land. In Texas - it was a 400 acre grant to the American settlers from the Mexican government - with conditions. The American immigrants had to learn Spanish, become Catholic, improve the land and be good citizens of Mexico. When there got to be enough gringos in town - they chased the Mexican governors out and ran up the flag for the new Texas Republic in 1836 and the gringo settlers did the same in California in 1848.
You can bet a few decades after they colonize the moon or Mars - the new colonists on Mars will want what the American colonists wanted from King George, what the Mexicans wanted from Spain and what the Texans and Californians wanted from Mexico - self rule.
Why would anyone from the US want to become a Mexican today? Just for starters - it's doubtful I will be able to afford a million dollar ocean view lot in Laguna Beach California in my lifetime. But in Todos Santos a little to the north of Cabo - you can trade a used pick-up truck for one.
If you believe history has a way of repeating itself - then tell those anti-immigration folk in the US to read that paragraph above regarding the histories of Texas and California. Then pack their family wagon and do another migration - this time to Mexico. And wave to Jose' as you pass him crossing the border heading in opposite direction. Let him figure a way to buy an ocean view lot for a million dollars in California. Or any lot in California for that matter.
It has been observed by some astute politicians and economists that borders make prisoners of people and affects commerce adversely on both sides. Open the border. Crazy? No. Western Europe did that and they prospered.
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