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Wednesday, February 18, 2015

Tax legislation has helped drive up U.S. citizenship and residency renuncations

Revocation of U.S. residential status
A growing trend is evident in U.S. residential data
American citizens and residents are setting a departure trend away from home as annual renunciations rise. In 2014, the number of people seeking to drop their legal status in the U.S. rose to 3,415 from 2,999 per the Wall St. Journal. What is more, the fee for revoking Citizenship rose from $450 to $2,350 in 2014.

The rise in people seeking alternatives to U.S. citizenship is not considered random. Rather, it is believed to be related to tax legislation and stricter enforcement of tax law by the Internal Revenue Service. More specifically, a Migration Information Source report states tougher asset-disclosure rules authorized by the Foreign Account Tax Compliance Act and heightened IRS reporting requirements are to blame.
The law is intended to increase federal tax receipts by up to $100 billion annually according to the Huffington Post. Furthermore, by putting pressure on foreign banks to disclose account information about U.S. citizens living abroad, international Americans are finding more reason to consider what country they belong to. This asset-disclosure pressure also extends to tax havens such as Switzerland; this country in particular has financial laws that closely protect clients' privacy, yet it has also taken up the issue in its legislative and judicial governing bodies.
Although the number of renunciations is small relative to the entire U.S. population, compared to 2008's 235 renunciations, it is a notable increase. What is also striking is the fact that the Foreign Account Tax Compliance Act will not even go in to effect until July 2014. Even so, the number might be higher should the process be carried out in the United States. Moreover, The U.S. State Department states individuals must visit a U.S. consular or diplomatic official in a foreign country and sign an oath of renunciation before their expatriation becomes legally valid. What is more, back taxes are not forgivable.

An additional obstacle that puts pressure on individuals to not give up their nationality is an exit tax. Since it is high net-worth individuals or persons with high incomes that are often among those seeking naturalization or repatriation elsewhere, the exit tax applies to persons worth over $2 million or with a 5-year income tax liability of $150,000 or more per WPTV. The heirs of individuals who have forgone their U.S. citizenship are also potentially liable for the exit tax. Moreover, in a Zero Hedge article written by Simon Black, the exit tax penalizes the right of expatriation set forth by the Act of May 27, 1868.

In the past, abundant annual growth of the gross domestic product, international commercial and political leverage and an accommodating monetary and fiscal policy attracted wealth and business to the United States. However, as the government seeks to reign in a growing national debt and cope with a sluggish economic growth amid a world that is becoming increasingly competitive, the capacity to retain wealth has become diminished. The link between economics and legislation with nationality is clear, what is not so clear is how best to reverse the trend without compromising the nations' interests.