If you don't like it, go somewhere else! With all of the options available to you, why settle for subpar service? That's great advice when you're evaluating where to eat dinner, but does that same advice hold true for your citizenship?
You may have never heard the name Eduardo Saverin, but thanks to the recent Facebook IPO, Saverin joins the small, elite club of billionaires. Saverin is a co-founder of Facebook, but found himself in the news for another reason: Saverin renounced his United States citizenship and became a citizen of Singapore. Saverin is labeled as an expatriate under United States law.
Matter of Convenience
Saverin's publicist said it was more for convenience than finances, but consider this: Singapore has no capital gains tax and the top tax bracket is 20%. In the United States the capital gains tax is 15% and the top tax bracket is 35%, but both of those rates are set to rise if Congress doesn't act. Since most of Saverin's earnings are in the form of capital gains, renouncing his citizenship makes financial sense.
But how about the non-billionaires? In 2010, 1,728 people gave up their citizenship compared to only 235 in 2008. What would make people take such a bold step?
According to experts, the United States is getting far less tax-friendly as the country finds itself in serious economic trouble. U.S. taxes are almost sure to rise in the coming years and with the political climate favoring taxing the wealthy even more, the nations wealthy are finding it more advantageous to take their family, and their money, elsewhere.
Before you consider renouncing your citizenship and moving out of the country, you'll probably want to earn your way out of the 99%. Some countries don't make it easy for you to move in. One Caribbean island requires that you purchase a home of at least $400,000 or make a minimum contribution of $250,000 to a public charity. Italy, as well as other nations, make it easier to become a resident, but the cost of moving out of the United States will be high.
If you were to liquidate every investment you have today, what would you owe the IRS? Even the median income earning citizen may have a 401(k) of six figures or more. In order to renounce your citizenship, you have to pay an exit tax equal to the taxes you would owe on all of your investments. You may be exempt from this tax depending on your income level, but if you have the money to consider packing up all of your belongings and moving out of the country, you'll probably be paying the tax.
Don't Expect to Come Back
If you're hoping to become an official citizen of another country, but still spend the majority of your time in the United States, that probably won't work. In order to come back, you'll likely need a visa and that will likely give you a maximum of 120 days in the country. If you're found to be acting as a resident instead of visitor, expect that visa to be revoked.
Your Family's Tax Bill
In the eyes of the IRS, once you renounce your citizenship, the IRS treats you as if you passed away. If you leave family or friends any money, they will have to pay tax equal to the current estate tax rates. If you left a family member $10 million, the IRS will take $3.5 million of it in taxes.
The Bottom Line
Is it worth the hassle? People with a lot of assets, a love of another country and its culture, and a good attorney may find that renouncing their United States citizenship may have some advantages, but for most citizens moving abroad for financial reasons probably isn't a practical or financially sound choice.