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Freedom, taxes and citizenship: Growing numbers renouncing U.S. citizenship

Most Americans envision our country as the "land of the free and home of the brave" and unique because so many people have emigrated here to share in America's success. Oftentimes, they move to get away from a restrictive government to move where they can work hard and succeed based on their skills, initiative and enjoy the fruits of their success.

Many people still want to come here. Unfortunately, more citizens are also leaving the country, especially those who are more successful such as the Facebook co-founder who renounced his citizenship. And they are leaving despite economic roadblocks put in place by the government.

On February 7th, the Treasury Department published the names of Americans renouncing their citizenship in 2013. According to Andrews Mitchel, an international tax attorney who tracks the expatriations at his International Tax Blog, 2,999 Americans renounced their citizenship in 2023, a 221 percent increase over the 932 total in 2012

While still a small number, this is a new record number for the United States--a country that prides itself on individual and economic freedom. (The United States has fallen in the economic freedom index and, after many years near the top of the list, we are no longer in the top 10.)

The trend of Americans leaving is like the canary in the coal mine used to warn miners of impending problems from danger. The trend is growing and those leaving may be expressing their views of the direction the country is moving while they vote with their fee.

Here are the numbers of Americans leaving over the past several years:

  • 2008: 231
  • 2009: 742
  • 2010: 1534
  • 2011: 1781
  • 2012: 932
  • 2013: 2999

Among the popular countries attracting these former American citizens: Australia, Norway, Singapore, Cayman Islands, Costa Rica, Guernsey and Antigua. In 2012, Canada held, for the first time, a ceremony welcoming new Canadians who were renouncing their American citizenship.

One reason for people leaving is how our tax system works. A French citizen, for example, can live outside the country, retain French citizenship, and not be subject to French taxes since he is not living there. The United States is one of the few countries that taxes expatriates living outside their country. While the first $96,000 or so is often not subject to American taxes, the exclusion is not sufficient for those who are wealthy and still paying U.S. taxes while living abroad.

Another reason for many renouncing their citizenship is called FATCA.

In 2010, Congress enacted The Foreign Account Tax Compliance Act (FATCA), which requires U.S. taxpayers, whether living abroad or in the United States, who own financial assets outside of the United States and meet the filing requirements to report the fair market value of those assets on an annual basis to the IRS. The assets are reported to the IRS so the U.S. government can record the value and location of these assets.

FATCA also requires foreign financial institutions, such as banks, insurance companies, mutual funds and brokers/dealers to report certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The result is that Americans living abroad have to comply with substantial tax regulations. Moreover, it is now difficult for them to obtain banking services from financial institutions that find it too expensive and our federal government so intrusive in their business they no longer want to provide services to Americans.

For many of these people, some of whom have not lived in the U.S. for many years, renouncing citizenship is a logical step.

The head of American Citizens Abroad, a non-profit organization in Geneva, Switzerland, says that many of their members are scared about reporting requirements they did not know existed and that this is pushing some Americans to abandon their citizenship. She says that “Americans abroad are terrified. We’ve had people pay tens of thousands of dollars in fines. We’ve had people … pay huge amounts of back taxes.” And, “Up to this point, we never heard of anyone renouncing, or if they did, they didn’t talk about it. Now we’re seeing a lot of people speak openly about it and come to us for information.”

While it may seem attractive, renouncing American citizenship and leaving the country isn't easy and may be expensive.

To give up American citizenship, and to escape future American taxes, you may have to buy your way to freedom from the federal government. There is an exit tax on the fair-market value of all of your assets — including real estate, securities, businesses and personal belongings — less what you have put into that asset such as the purchase price and improvements.

The exit tax is like an estate tax in that, for some wealthier people, everything that would be part of your estate will be subject to income tax on unrealized gains as of the day before you expatriate, as if you sold all your assets the day before leaving. In effect, in ensures your assets don’t escape an estate tax. This provision is sometimes referred to as “America’s Berlin wall” as it is obviously intended to discourage wealthy Americans from leaving.

To leave the country and renounce your citizenship, you cannot just walk away. You must prove you have been complying with federal tax laws in the United States for the past five years. And, if you have a net worth greater than $2 million or have average annual net income tax for the five previous years of $155,000 (in 2013) or more, you pay an exit tax.

The provisions of U.S. tax laws, and not just the amount of taxes required, are also leading more Americans to renounce their citizenship. Many Americans living abroad were not aware of filing requirements for U.S. tax purposes. And, with the new IRS reporting requirements, living abroad as an American is now more difficult as many institutions do not want to take American accounts as complying with the American reporting requirements are too expensive and too difficult.

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