Doc's note: Each year, thousands of Americans decide to give up their citizenship. But how exactly does it work, why do people expatriate, and what does it mean if you ever come back to the U.S.?
Today, our global-living expert Kim Iskyan answers these questions and more...
The cost of living in the "land of the free" is much higher than most people ever realize...
It's true that every time tax season rolls around, we like to complain how much the IRS is taking from our wallets. But for those American citizens who choose to live and work abroad, Uncle Sam makes you pay extra for the choice... in terms of money and time.
On Tuesday, I explained the high cost of being an American who doesn't live in America. (If you missed it, catch up here.)
Now, you've finally decided it's time to give up your American citizenship. What do you need to do next?
Step one is to get a new citizenship. It's no good to be stateless, as we learned from Tom Hanks in the 2004 movie The Terminal. Presumably, you already live somewhere else (wanting to expatriate, but still live in the U.S., makes as much sense as quitting a job but wanting to keep your desk in the office). And you're ready to leave your U.S. citizenship behind
Step two is to toss your U.S. passport, or green card, and be done with it. Right?
No... of course it's not so easy. If you have a net worth (that is, the value of everything you own, minus outstanding debt) of more than $2 million, or meet a few other wealth and income criteria, you're what's called a "covered" expatriate. That means that you'll be hit with an exit tax. (Note that if you've held a green card for eight years or more, you're treated as a U.S. citizen for expatriation purposes.)
Here's how to compute that tax, roughly speaking: Pretend that you sell everything you own, as part of a make-believe "giant mark-to-market event," international tax lawyer Phil Hodgen told me. That includes stocks, real estate, gold, Beanie Babies collectibles, and everything else, in the U.S. and anywhere else. Add up the capital gains on all of that (that is, the tax on the difference between purchase price, and the pretend sales price).
The good news is, the first $744,000 in capital gains is tax exempt. Anything over that, though, is taxed at regular capital gains rates (which can be up to 37%, depending on your tax bracket and on how long you've held the assets that are "sold").
(Mind you, you don't actually sell anything... but you have to pay taxes as if you did. However, the day that you in fact do sell, you can offset the taxes you've already paid from the pretend sale.)
If that sounds complicated, it is. And that's part of why there aren't more Americans who give up their U.S. passports.
And once you give up your passport, if you want to visit the United States, you'll be treated like the foreigner that you (now) are. If you hold a European Union passport, you can visit for up to 90 days without a visa. Citizens of many other countries need to apply for a tourist visa. If you wind up getting a job in the U.S., you'll have to submit to the same blizzard of immigration documentation as any other non-U.S. national looking to live in America.
Is there a blacklist of former Americans? Will you get hassled at passport control upon entering the U.S. if you surrendered your American passport? Phil's specialty isn't immigration issues, but he says, "I can only think of two people I've worked with who had problems, and they ultimately entered the U.S."
But Uncle Sam isn't above naming-and-shaming. Every quarter, a list of now-former Americans is published... for example, the latest roll of shame (or honor, depending on how you view it) is here.
Why Bother Expatriating?
If you're an American abroad, it's easy to imagine – fantasize – that your income can slip between the cracks. You work for a local company and your paycheck goes into a local bank... How would the IRS ever know, right?
Or you don't want to "officially" give up your U.S. passport. You live abroad, and you haven't told Uncle Sam where you are in years. What if you quietly put your passport in the circular filing cabinet and just don't submit a 1040 again... ever?
It might work. But the arms of the American government are like those of an octopus... its ears are like a bat's... and its vision makes eagles seem nearsighted by comparison. If you take this route, chances are that you'll never be able to visit the U.S. again. You may never be able to move money into or out of the U.S. or own assets in America. One day, your local bank might start asking questions about your citizenship. Even if you're not rich, Uncle Sam and the IRS may find you. (And remember... the entire international banking payments structure, the SWIFT system, runs through the U.S... don't think they're not looking.)
Maybe you're perfectly safe and can stay under the radar indefinitely. But do you want to take that risk?
"The government's ability to gather information about you gets better every year," Phil told me. "Your clever tactic today will probably not work five years from now, and now there's five years of history for the government to use against you."
He calls it a "'money or your life' question." Rather than forever worry that the IRS might catch up with you, it's better to make a clean break. Consider it the price of breaking up.
Expatriating is a long, expensive, and difficult path to take. But, as I explained Tuesday, it could save you a lot of money – and hassle – in the long run.
I've only covered some of the basic points here. So if you're interested in learning more...
Phil's web site has a section on expatriation, here. If you want the official explanation of the expatriation tax from the IRS, you can find it here.
March 4, 2021