Why Are Americans Giving Up Their Passports?

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USA Passport

Record numbers of taxpayers are giving up their US passports – but no one is sure why or even if they are Americans or why they are leaving the country.

In the three months to September 2016, 1,380 taxpayers renounced US citizenship, says the US Treasury.

All their names were provided in an official listing, but no one knows whether they are Americans are not as the list includes green card holders and does not show who is a US citizen.

Right wing commentators mostly in the Republican Party claim indignant taxpayers are fleeing the country due to intrusive Foreign Account Tax Compliance Act (FATCA) laws.

FATCA demands foreign financial institutions must tell the Internal Revenue Service (IRS) about any cash or investments US resident taxpayers hold overseas that add up to more than $50,000.

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FATCA and expats

They must also tell the IRS about US expat financial affairs, but only if their cash and assets total more than $200,000.

The IRS says FATCA has prompted around 100,000 errant US taxpayers to update their tax filings or to confess they had secret overseas cash and investments.

The rush to beat FATCA has triggered a windfall of $10 billion in undeclared taxes, interest and penalties for US Treasury coffers.

The number of Americans renouncing citizenship sharply spiked when FATCA came to the statute book.

Until the last quarter of 2012, the peak was 560 Americans handing back their passports in the second quarter of 2010 and an average of 261 a quarter from January 2008 until December 2012.

In 2013, the trend started to head upwards.

US citizenship comes at a cost

In Q3 2015, renunciations hit a new high – 1,426 in the quarter.

Since January 2013, the average has soared to 911 Americans leaving the USA for good.

FATCA has probably focussed Americans on how much their citizenship is costing them in comparison to other countries.

US tax rules dictate that Americans must pay tax to the government wherever they live in the world, even if they already pay tax on their income there.

For an American retiring to Dubai, which has zero income tax and no capital gains tax, retaining a US passport is an expensive luxury.

1 COMMENT

  1. As US expat, I’d like to thank you for publishing an article about this controversial yet largely unknown law. Here are the thoughts of me and many other Americans abroad:

    First, FATCA, while noble (who doesn’t want to catch uber-wealthy domestic tax cheats who offshore their assets?), is akin to performing surgery with a baseball bat. As a result, almost every US expat and accidental American (someone who was born in the US to foreign parents but never lived there) faces unprecedented discrimination in their country of residence.

    Banks, scared by the 30% withholding penalty for not disclosing the accounts of their American clients, have decided to either forbid US citizens from banking with them or severely limit their activity. Long-term US expats (many who are married to foreigners) have watched in horror as their investment accounts have been closed. With nowhere to turn to, they have to liquidate retirement funds well before maturity, exposing themselves to local tax penalties for doing so.

    In other cases, US citizens have had their mortgages revoked, solely on the grounds of their nationality. While I’m no expert in US civil rights laws, my guess is that if a state or the Federal Government enacted allowing discrimination based on country of origin, it would roundly get rejected by the courts.

    In addition to FATCA, US expats must file an FBAR (Foreign Bank Account Report) with the Dept. of Treasury’s Financial Crimes department. The US citizen must report all accounts they have signatory power on if any of those accounts had a balance of 10,000 USD at any given point during the calendar year, including those belonging to their foreign spouse (regardless if they don’t have a TIN). Additionally, if the US citizen can sign for a corporate account at their work, that account must be reported in the FBAR, even if their employer does zero business in the US.

    The US, unlike every other country on the planet bar Eritrea, practices citizen-based taxation. This means that wherever an American is, they have a “civil duty” to pay taxes, even if they haven’t stepped foot on US soil in years. On the other hand, the rest of the world uses residence-based taxation, meaning that if you’re French, but you live and work in Spain, you only pay taxes to the Spanish.

    And before you say “well that’s normal; US citizens should pay their part,” think of it this way: Let’s say that Illinois passes a law saying that anyone with an Illinois-issued birth certificate must declare their revenue and pay in-state taxes, regardless of where they live. And you, born in Chicago, but living and working in San Francisco, must now comply. Do you think that this would stand up in court? Or that there wouldn’t be widespread outrage?

    For us expats, this is the reality we are facing, and sadly, most Americans in the US don’t know about this.

    As a result, hard working, middle-class US citizens living abroad (which can easily define most of them), are facing tough decisions; some are taking the legal if unethical steps of creating shells. Others are putting assets in their foreign spouses’ name. Finally, like your article mentions, others are giving up their nationality – often with an incredibly heavy heart.

    However, the vast majority of us don’t want to do that. Despite the near-historic discontent in the US, we still love our country and proudly represent it throughout the world. We just want to have the same rights as the rest of the global expat community, and that includes tax policy that doesn’t punish us for where we were born or where we choose to live.

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