Americans are finding more reasons than ever to take the drastic step of giving up their U.S. citizenship, and the gridlock in Washington may push even more people to run for the borders.
Avoidance of taxes is what many believe led Facebook co-founder Eduardo Saverin to renounce his citizenship before the firm's infamous initial public offering that made the wealthy technology guru even richer. Mr. Saverin, who has lived in Singapore since 2009, denies that the cause was taxes.
Just last week, it was reported that socialite Denise Rich (whose former husband, Marc, was pardoned by President Bill Clinton in 2001) recently renounced her American citizenship. She did not cite tax avoidance, but the “exit tax” she had to pay would likely end up being less than she would have owed in coming years if tax rates rise as currently projected.
In fact, the coming so-called “fiscal cliff” is one of the prime reasons the number of Americans permanently renouncing their citizenship is on the rise, according to international planning attorneys.
Unless Congress and President Barack Obama agree to changes, as of Jan. 1, the Bush-era tax cuts expire, taxes on capital gains and stock dividends increase, and a 3.8% tax on net investment income for high-earners kicks in — resulting in some wealthy Americans' facing a top tax margin rate of nearly 40% on income and 25% on investment gains.
“Lots are worried that Congress won't act in time and they will be stuck with higher taxes and higher capital gains,” said Joshua Rubenstein, national head of the trusts and estate practice for Katten Muchin Rosenman LLP.
About 1,785 people renounced their citizenship in 2011, a 16% increase from 2010 and more than the total from 2007, 2008 and 2009 combined. If the amount of those renouncing were to jump another 16% this year, it would top 2,000.
In many of the cases Mr. Rubenstein handles, Americans are renouncing their U.S. rights because the expense and hassle of their citizenship just isn't worth it anymore. Most of them already live abroad and have dual citizenship.
“For Americans residing overseas in particular, they're weighing the costs of having a U.S. passport,” said Jim Duggan, a tax attorney at Duggan Bertsch LLC.
The U.S. is one of only a few nations that require tax payments from their citizens who already are taxed by their foreign nation of residence. The
Internal Revenue Service in recent years has increased penalties on American expatriates who don't report their foreign bank accounts, and pressured overseas banks to cough up U.S. client names.
Switzerland-based
UBS AG in 2009 paid $780 million to the Justice Department to avoid indictment for helping 19,000 wealthy Americans keep about $20 billion in hidden accounts. Next year, a new law will require foreign institutions to report all assets owned by Americans.
The prospect of the new requirements is making it harder for American citizens to find institutions willing to open up accounts for them overseas, and many foreign banks are concluding that they really don't want to deal with U.S. taxpayers anymore, Mr. Duggan said.
In Singapore, many Americans have said they have trouble finding a bank that will even talk with them, he said.
“The rules are just making it more difficult for people who live abroad to live their lives overseas,” Mr. Duggan said.
The number of Americans renouncing overall is still small for a country of 314 million people. Not many financial advisers have had clients give up their U.S. passport.
“Over the last 27 years, I don't remember anyone thinking seriously about renouncing,” said Tom Hoffman, an adviser at KAF Financial Advisors LLC. “They've kidded about it, but no one has ever done it.”
