Should You Renounce Your Citizenship?

The Cost of Living Abroad

Written by Joseph Carducci
Posted September 6, 2013 at 2:42PM

I have a good friend named Don who has chosen to spend most of his time outside of the United States. This decision was based on a number of factors, to be sure, but some of his primary reasons were financial.

Did you know that the U.S. is the only country in the Organization for Economic Co-operation and Development to tax its citizens on income no matter where it is earned and no matter where that citizen has chosen to reside? According to Don, even if he earned all of his income from his business down in Ecuador, the IRS still takes a bite out of it. Yes, you would also be correct in thinking that it is still a BIG bite.

passport burningSo earlier this year, Don became a statistic, joining the league of Americans renouncing their U.S. citizenship. In just the second quarter of this year, the number of Americans doing this increased six-fold compared to the same period last year. During this three month period, 1,131 Americans (including my friend Don) actually turned over their passports at various U.S. embassies, according to RT. The same period in 2012 saw only 189 people take the same action.

And if you look over the first six months of 2013, you will find that 1,810 people have renounced citizenship. These numbers have dramatically risen in recent years. During all of 2012, only 932 people did this, up from just 235 in the year 2008.

Why U.S. Citizens Renounce

Although you would be correct in assuming that everyone who decides to renounce his or her U.S. citizenship certainly has a unique set of reasons and priorities, there are some commonalities. For starters, the U.S. government has begun to implement a series of new financial disclosure rules that will make the entire process of tax compliance overly burdensome. Many have just simply become tired of dealing with the already increasing complexity of filing.

In most cases, a U.S. citizen living overseas will need to file taxes in both countries. This is simply a fact of life for U.S. ex-pats, and it can cost many hours in time or hundreds to thousands of dollars in terms of tax preparation fees, filing fees, and even fees for gathering the proper forms. Not to mention the headache of actually finding someone in your foreign country who really and truly understands how to do all of this! Don said that simply finding someone to help is a challenge in itself.

This new law, the Foreign Account Tax Compliance Act (FATCA), was passed by Congress in 2010 and is being implemented this year. It will require foreign institutions to report all assets owned by Americans to the IRS. This alone will create a huge compliance burden for these foreign banks.

This has already caused a lot of resentment. In many cases, a number of foreign banks and other financial companies have simply decided it will cost too much to comply, and they are no longer welcoming American clients; existing clients are having their accounts closed.

You may be thinking that surely the IRS and the U.S. government have good reasons for implementing such a law. That it is aimed at nabbing those evil “tax evaders” that the IRS claims do not pay upwards of $100 billion per year in taxes.

Although this is certainly the stated goal of FATCA, the actual facts are far from this. A number of immigration firms that have been handling citizenship renunciations report that the people who are taking these steps are not ultra-wealthy tax exiles or even people who have something to hide (contrary to the many media reports). They are normal, everyday people who are just spending too much time and/or money each year complying with an increasingly unfair, overly complicated, and ever-changing tax code, CNNMoney notes.

Of course, there are a number of wealthy people who are renouncing as well. But by and large, this is an exodus of those just like you and me (and Don) – people who have nothing to hide but are just tired of the mess of all this, and people who have become really afraid of this law. It has a lot of teeth in terms of serious penalties...penalties which are levied even for filing the wrong form, even if no tax is actually due!

Why Americans Move Abroad

Another question you might be asking is why Americans decide to move abroad in the first place. Well, again, this is a highly personal decision, but there do appear to be some common factors. For one thing, the cost of living in many other parts of the world is much lower than in the U.S.

Consider these facts: real estate in Costa Rica is 57 percent lower than in Philadelphia, consumer prices in Thailand are 59 percent lower than in Boston, and even groceries in Spain are 36 percent cheaper than in San Francisco.

In many cases, it can also be easier for you to open up a business in a foreign country. Sure, some of the governments can be a little interesting to deal with, but the lack of official regulations and much reduced paperwork can make this an attractive option.

The pace and style of life is often much more relaxed and laid back in many foreign countries than in the U.S., which can be appealing to retirees looking for cost savings or really anyone who is just tired of the rat race.

In case you were wondering, there is already a large number of U.S. citizens who reside overseas. In 2012, the estimates were between 5 and 6 million. Certainly, this number has increased already during the first half of 2013. Plus, estimates also indicate that there are currently at least another 3 million Americans “thinking” about moving overseas.

Most of those who have made the move are very happy in the end. They report beautiful weather, especially in tropical climes such as the Caribbean, Latin America, and Asia. Of course, you will also usually hear about the lowered cost of living, with plenty of entertainment options and the ability to live or start businesses without having the government always breathing down their necks.

Deciding if Renunciation is a Good Option for You

Of course, everyone has a different situation. You will have many factors to consider should you think about making the decision to renounce.

First, you will obviously need to have a second passport (the U.S. will not accept any renunciation request without this), which can be difficult to get and certainly takes time. You will also need to really run your numbers and make sure living in a foreign country makes good financial sense.

You should also really check into the financial system of your intended destination. See if it is possible to open things like bank accounts, hold financial assets in your own name (in some countries you will not be allowed to hold property in your name until you become a resident or a citizen), and open your own business.

A great way to go about doing this research is to actually spend some extended time in your chosen destination. See what the property values and markets are like, experience the lifestyle, taste the food, and meet the locals. One very important suggestion you should always follow is to rent before buying property – even if you believe you are sure.

The final decision to make before you renounce your U.S. citizenship is to decide whether you will be happy cutting many emotional connections with home. Once this happens, it will likely be much more difficult to travel back to the U.S. to visit friends and family; you will no longer have total freedom of movement to come and go, but will need to go through the sometimes arduous process of obtaining tourist or visitor visas to secure entry.

Then again, if all of these factors are things you feel comfortable with, then – just like my friend Don – moving abroad and renouncing your U.S. citizenship could be an excellent decision.

 

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