Ex-American: staying financially secure after renouncing your US citizenship

User Written by Joseph Regan on February 16, 2016.

Ex-American: staying financially secure after renouncing your US citizenship

According to data from the US Treasury, a record 4,279 individuals gave up their US citizenship in 2015 – a 20% increase from 2014 (which was also a record-smashing year).

The numbers don’t lie: droves of American are saying farewell to Uncle Sam like never before, and these figures are predicted to increase year by year. But why? As an American and expat financial advisor, I’ll touch on some of the reasons why many US citizens are leaving, and also explain how you can secure your personal finances for life after America.

What’s causing the great American Exodus?

There are numerous reasons why expats are rejecting their American citizenship. One of my clients (a dual citizen of Mexico and the USA) plans on settling down in China with his partner. He’d rather be a Mexican citizen so he won’t suffer from American taxes.

Another client has an Italian grandfather, allowing him to become an Italian citizen. He prefers life abroad and, likewise, desires an EU member state passport to avoid US tax.

A lady I know is also contemplating the change since her business is taking off. As the story goes, she too doesn’t want to get slapped with double taxation.

Coupled with love, business or simply joie de vivre, the main factor why so many Americans are renouncing their citizenship is obvious: the dreaded American double tax. In fact, the US and Eritrea are the only two nations in the world that make their citizens overseas pay tax. That means if you are an expat in China, for example, you must not only pay tax to the Chinese government, but also to the US government. Your hard-earned income and savings are being gobbled up by two governments.

If you’re making under 106,000 USD per annum, you’re exempted from paying tax to the IRS (though you must still report it). However, the IRS has just started including other assets to count towards this figure. So if your salary and assets surpass the magic figure of 106,000 USD, you will be double taxed. And if you think you can hide, think again.

In 2012 the US government introduced FATCA (Foreign Account Tax Compliance Act). FATCA requires all US citizens to report their earnings and assets abroad. To reinforce FATCA, a new law introduced in 2016 allows the United States government to revoke your passport if you fail to pay or report your financial statements. Yikes!

FATCA is worldwide and allows the US to monitor more than 77,000 institutions and 80 national governments to check its citizens’ financial activities. Failure to report any information on behalf of the individual and/or institution can result in fines worth tens of thousands of dollars. The punishment is so grave that many foreign banks and financial institutions won’t even accept US citizen applications anymore.

How to renounce your citizenship?

Renouncing your US citizenship is legal and relatively straightforward, but it can be costly if you’re not careful. Here are the steps:

  1. Become a citizen of another country
  2. Appear in person before a US consular or diplomatic officer in a foreign country (normally at a US Embassy or Consulate)
  3. Sign an oath of renunciation
  4. Pay 2,350 USD (note: this was increased 422% in 2013)

There’s one major factor to consider. Since the US government is fully aware that the majority of US citizens renouncing their citizenship are doing so for financial reasons, they’ve created an exit tax. If you have a net worth of more than 2 million USD, or your average yearly income (net of tax) for the previous five years was 157,000 USD, you will be subject to the high exit tax.

With about 9 million US citizens working and living abroad, the American expat is the largest taxed constituency without representation (and the residents of Washington DC complain about taxation without representation!). And by the look of things, it seems like they’re using us merely to make more money. The government’s new international code is predicted to make nearly 9 billion USD in taxing its expat citizens! And get this: major American corporations who run operations overseas DO NOT get double taxed; instead they receive tax breaks.

What can I do to stay financially secure after abandoning my US citizenship?

For starters, you’ll need to have a bank account set up; I’d personally recommend an offshore bank account.

Second, you’ll most likely want to invest your savings. If you aren’t an American citizen anymore, the good news is you can enjoy the tax-efficient investments the rest of the world’s expats happily take advantage of.

Third, your American insurances won’t cover you anymore, so you’ll need to switch to another provider.

Fourth, your social security and retirement provisions may or may not (depending on a variety of circumstances) be upheld, so you will need to create new provisions for the future. Luckily, there are easy solutions for all the points above.

In the US, only two things are certain – death and taxes. But with a bit of careful planning you can eliminate one of these inevitable facts from your life. In fact, you will most likely be making more money after renouncing your citizenship!

If you are about to or are just considering renouncing your US passport, send me an email at jregan@infinitysolutions.com or call me at +86 152 2182 4499 for a free consultation. As an experienced expat financial planner and specialist in helping Americans and ex-Americans plan their finances, I’m sure I can help.

Joseph Regan

Joseph Regan

Posted on February 16, 2016 in American Expatriates.