Tax burdens prompt more Americans to ditch their citizenship
Tax burdens prompt more Americans to ditch their
citizenship
Some 9 million Americans reside abroad.
More than 4 in 10 wouldn't rule out renouncing U.S.
citizenship, according to a survey.
By Darla Mercado May 31, 2017
Americans abroad have just about had it with Uncle Sam's
tax filing requirements.
Those were the findings from a recent survey of more than
2,100 U.S. expatriates, according to Greenback Expat Tax Services, which
specializes in working with American taxpayers residing overseas.
Just over 4 in 10 respondents said that while they aren't
planning to renounce their U.S. citizenship, they wouldn't rule it out, and 19
percent said they're seriously considering it.
Half of those who are either planning or considering
giving up their citizenship say the primary reason is the burden of U.S. tax
rules.
"Tax requirements like the Foreign Account Tax
Compliance Act (FATCA) and the report of foreign bank and financial accounts
(FBAR) start to become more painful for people and they write to their
congressperson, seeking action," said David McKeegan, co-founder of
Greenback Expat Tax Services and an American residing in Indonesia.
"There's nobody lobbying on the behalf of these
people and fighting for your average American living overseas," he said.
Here are some of the tax issues facing the estimated 9
million Americans who live abroad.
Filing complexities
Two-thirds of the expats polled said they do not feel
they should be required to file U.S. tax returns each year — even though more
than 6 in 10 said they either didn't owe Uncle Sam anything or hadn't received
a refund last year.
Filing aside, however, citizens abroad still face plenty
of reporting requirements each year to keep the IRS and Treasury up to date on
their holdings in foreign bank accounts.
FATCA requires taxpayers to file Form 8938, a statement
of specified foreign financial assets.
These Americans abroad must also file an FBAR if they had
an interest in or signature authority over at least one account outside the
U.S. and the aggregate value of all the foreign accounts exceeded $10,000 at
any time in the year.
Penalties are painful for those who fail to file an FBAR.
You may have to cough up as much as $10,000 for nonwillful violations. If you
knowingly ditch the requirement, you may have to shell out $100,000 in
penalties or 50 percent of the balance in the account.
Of course, even the act of filing is cumbersome for
expats.
"There's
nobody lobbying on the behalf of these people and fighting for your average
American living overseas."
-David McKeegan,
co-founder, Greenback Expat Tax Services
"First you deal with the foreign currency
conversion," said McKeegan.
"Then you have to collect your bank records to show
interest and capital gains; not every place will provide that information the
way U.S. banks do in a 1099-style form," he said.
Meanwhile, foreign retirement savings accounts are
subject to a different tax treatment under the U.S. tax laws. For instance,
contributions to superannuation funds in Australia may be subject to taxes,
said McKeegan.
Pause before you bail
Last year, a record 5,411 individuals renounced their
citizenship or ended their long-term residency in the U.S., according to data
from the Treasury. That's a 26 percent increase from 2015 when 4,279 people did
so.
If you give up your U.S. citizenship, you may have to pay
an exit tax.
In this case, the IRS would require you to estimate your
assets at fair market value and treat them as if you sold them the day before
you became an expatriate.
What you owe will be based on the type of asset you own.
For instance, if you have a brokerage account, you could
be on the hook for a tax as high as 20 percent, plus a 3.8 percent net
investment income tax. Other holdings could be subject to federal income taxes,
which have a top rate of 39.6 percent.
You may encounter additional complications related to
estate and gift tax planning, too: U.S. citizens generally can exclude up to
$5.49 million from estate taxes.
Once you give up your citizenship, your stateside heirs
could be on the hook for a 40 percent tax on assets they receive from you or
your estate.
"Since the person expatriated, the U.S. can't claim
taxes from the donor," said Joshua Ashman, a CPA and co-founder of Expat
Tax Professionals. "You need good planning to avoid the pitfalls in gift
taxation after expatriation."
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