Doc’s note: What’s the cost of being an American citizen? Today, our global-living expert Kim Iskyan details the high cost of American citizenship and why some folks are giving it up…
To many Americans, it ranks with barbequing a bald eagle, taking a jackhammer to the Statue of Liberty, or blowing your nose on the Stars and Stripes.
To others, it’s the only way to end an expensive, time-consuming, and pointless annual administrative headache… or to build an international business without endless hassles… or to pass on a large portion of a hard-earned inheritance to a government that you have little connection with.
And for some of the estimated 9 million Americans who live abroad, it’s an option that may cross their mind on April 15 every year… but they know they won’t do it.
I’m talking about giving up your American passport… ditching the little blue booklet for good… burning your Social Security card… and kissing Uncle Sam goodbye.
Expatriation – when you give up citizenship of your home country, to become a citizen of a different country – is the nuclear bomb of citizenship options. It’s like divorcing your home country… with no way back.
Last year, 6,705 Americans gave up their passport or their green card (which allows a foreigner to live and work in the U.S. permanently). That was an all-time high, and up 260% from 2019… and from just 1,500 people a decade ago.
Out of a population of 328 million, that doesn’t sound like much. But those figures are low partly because – as I’ll explain later – it’s so difficult to give up your American citizenship.
And probably not for the reason you might imagine…
How Much Is Your American Citizenship Worth to You?
Few Americans think much about being anything other than American (though there are plenty of options for second citizenships). For most people, the nationality they were born with is all they know. And if it mostly works, why try to fix it – or swap it for another one?
And for most Americans – those who live in the United States, at least – taxes are the price of living in the “Land of the Free.” You’ll do what you can (legally… right?) to minimize your tax burden. But unless you’re prepared to go hardcore mountain man and live off the grid – without a street address, health insurance, or even Amazon deliveries – Uncle Sam is going to find you to claim his pound of flesh.
What if you’re an American who doesn’t live in the U.S.? Then it’s a different story. The U.S. is one of two countries on Earth – it’s in the company of the East African nation of Eritrea (which used to be part of Ethiopia) – that legally obliges its citizens to pay taxes on global income (that is, wherever the income is earned).
Every other country on earth imposes taxes based on residency – if you live there, you pay taxes but otherwise, you don’t. So if you’re British living in the U.S., you pay Uncle Sam, but not the Queen. There’s a certain fairness to that: You’re not taking advantage of the services Britain offers, so why should you pay for them?
But that’s not what the American government thinks. Wherever you live and work, Uncle Sam demands his cut – even if you’re not enjoying the benefits of living in America. It’s like paying rent for a house that you’re not living in.
I’ve lived most of my adult life outside the U.S., and the price of being American adds up. Over time, I’ve paid far more to Uncle Sam than I have to anyone else for anything, ever (including any of the countries I’ve spent years living in).
That’s probably the same for lots of other Americans… their tax bill may be their single biggest expense. It’s one thing to pay taxes and experience some of the benefits of those taxes. But if you’re not breathing the air, driving the roads, drinking the water, or getting the pension based on what you put into the system… why pay for it?
As Bloomberg explained in August…
The U.S. is almost unique in the world in taxing based on citizenship rather than residency. It’s also uniquely parochial in being unable or unwilling to distinguish between, say, a rich American living stateside and stashing money offshore and, for example, a middle-class American married to a German and teaching elementary school in Berlin. The hell starts with that conflation.
If I added up the amount I’ve paid to Uncle Sam in taxes and then calculate how much I’ve paid on a day-in-country basis – that is, if my taxes were “rent” for the time that I’m actually on American soil – it would probably work out to as much, daily, as the swanky One&Only Palmilla resort in Los Cabos, Mexico. Even one of the “cheap” rooms here costs around $1,000 per night. And while I stay in fine places when I visit the U.S., most of them aren’t five-star resorts.
Why Do People Give Up Their U.S. Citizenship?
But as it happens, for most people who give up their American passports, taxes aren’t the reason. In fact, it’s barely in the top three.
“It’s a popular belief that people giving up their American passports are trying to get out of paying taxes. But that’s a lie,” Phil Hodgen, an international tax lawyer in Pasadena, California, told me. Phil estimates that over the past 11 years (since the current U.S. citizenship exit laws came into effect), he has helped several hundred people navigate the U.S. tax rules that affect them when they expatriate.
According to Phil, “Most people who leave the U.S. end up in other high tax jurisdictions,” like Australia, New Zealand, or Europe, which suggests that they’re not trying to get out of paying taxes.
Paul believes the biggest reason that soon-to-be-former Americans give for wanting to get rid of their American passports is the administrative overhead.
In other words… just filing the Form 1040 (standard and pretty simple for most Americans) can be expensive and time-consuming for people living outside the U.S. “If you’re a schoolteacher living and working abroad and you make $60,000 a year, it can cost you $4,000 just to file your taxes – even if you don’t owe anything,” Phil said.
That might sound like a lot to pay an accountant – especially when, right now, you can log on to H&R Block and pay all of $69 to file your income taxes. But the complexity of April 15 escalates if you’re living abroad because there’s a brain-numbing array of calculations and deductions and conditions… How many days were you outside the country? Who paid for your housing? Do you have foreign bank accounts? What currency were you paid in? Did you pay taxes on foreign stocks? And what if your spouse isn’t American?
If you’re an American building a business abroad – say, with multiple corporate subsidiaries in different countries – the complexity metastasizes. To navigate the shoals, you’ll need a specialized tax attorney, and you’ll also need to spend a lot of time thinking about how to best structure your business to satisfy the IRS. That’s energy that you could put toward something more productive, like your business. And worst of all, you don’t get anything out of it – except to keep your U.S. passport and the ongoing worry that the IRS might not like your paperwork.
For an American living abroad, the 1040 is a paper equivalent of a minefield. Make a mistake and the IRS assumes that you’re looking to cheat them and penalizes you accordingly. Paying a pricey accountant is worth reducing the chances that you’ll receive a thick 8.5×11-sized envelope from the IRS.
A different kind of “tax” that Americans abroad face is the challenge of doing something as simple as opening a bank account. American regulations – unlike those of any other country – force financial institutions in the rest of the world to adhere to American rules… If they want to do business with American citizens or corporations. Rather than suffer the expense, risk, and burden of this tax on dealing with Americans, many foreign banks refuse to do business with them at all.
(Just for fun: The next time you’re abroad – whether it’s Mexico, Italy, or Hong Kong, when we can travel again – walk into a local bank branch and try to open an account. One of the first questions you’ll be asked is: Do you hold an American passport? If you do, you’ll very likely be shown the door. If you lie and say you don’t… well, as I’ll explain later, just don’t.)
The second most-cited reason that Americans give for surrendering their U.S. passport, Phil told me, is the estate tax. That’s the tax on an individual’s assets after death. The first $11.58 million in assets is exempt, though – so being hit with the estate tax is an aspirational problem for most of us. If you are that wealthy, though, Uncle Sam could claim 40% of your assets above that level – which, if you’re looking to pass on a business or a significant amount of other assets to the next generation, is a deal-killer.
Of course, some Americans give up on Uncle Sam because they don’t want to pay taxes – and they go to a low-tax jurisdiction. But the fact of the matter is that people with money might want to visit a low-tax country… And living in a tax haven like, for example, Turks and Caicos might be fun for a while, but you don’t want to live there – because even the Caribbean beach gets boring after a while. “The simple fact is that people with a lot of money usually want to live the kinds of lives that you only get in a major city in a high-tax country,” Phil said.
Finally, a handful of Americans expatriate for political reasons… because they feel so strongly about the political trajectory of the U.S. that they want out, for good. (As I wrote here, attention-seeking celebrities are particularly guilty of claiming that they’ll leave – though they almost never do.)
But every country has lousy politicians… to give up one citizenship hoping that another country will be better is probably a lousy idea. And the actual number of people who leave for political reasons is microscopically low.
So let’s say you decide, despite it all, that you want to give up your American passport. What’s the next step?
Keep an eye on your inbox because on Thursday, I’ll explain exactly what you need to do to become an expat…
March 2, 2021
P.S. Are you an expat? We’d love to hear about your experience… Share your story at [email protected].