How much is it worth these days NOT to be a U.S. citizen? Quite a lot, apparently.
As an undergraduate in Economics 101, I was taught that supply and demand curves intersect at the “market-clearing price.” That’s where the number of buyers equals the amount of a product that sellers can profitably supply. Raise the price, though, and there are usually fewer buyers at the market-clearing point — only those to whom the product is worth a great deal.
What does it mean when the price of a product goes up by 422%, but the number of buyers triples? It means that product has suddenly become a lot more valuable to those people.
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And that’s exactly what’s happened in the “market” to expatriate from the U.S. …
Scrambling for the Exits
U.S. citizens can expatriate, a process of legally ending their citizenship. Expatriation is formally known as “renunciation.” You fill out a form. A State Department official subjects you to two interviews similar to those “retention specialists” who try to convince you not to cancel your cable contract. You settle accounts with the IRS, hand over your passport and leave. The next time you visit the U.S., you’ll need a visa (which in some cases, isn’t granted).
In 2014, the State Department raised its fee for this process from $450 to $2,350, claiming the previous price didn’t fully capture the costs involved. But something funny happened. The number of citizens renouncing their citizenship more than tripled from the previous few reporting periods.
That suggests that the intrinsic value of ceasing to be a U.S. citizen has skyrocketed, enough that people are willing to pay a lot more to do it.
The real cost to expatriate, however, can be much higher than the State Department fee.
Expatriate – What You’ll Pay
Uncle Sam will be sorry to see you go. So sorry, in fact, that he’ll want to keep a part of you for himself.
To renounce U.S. citizenship you must prove five years of U.S. tax compliance — all returns submitted and taxes paid.
But if you have a net worth greater than $2 million or an average annual net income tax for the five previous years of $157,000 or more (that’s tax, not income), you’ll pay an exit tax. It’s levied at the prevailing capital gains rate, and calculated as if you sold your property the day before you cease to be a citizen, even if you don’t. (Fortunately, the first $680,000 of these theoretical “capital gains” is exempted from the exit tax.)
On top of the exit tax, anyone to whom you give or bequeath any of your U.S. assets must pay tax at the prevailing gift/estate tax rate (they were unified under the American Taxpayer Relief Act of 2012). You can take the annual gift/estate tax exclusion ($14,000 for 2015), but the lifetime federal estate and gift tax exemptions ($10.9 million) won’t apply.
Let’s say you want to give $100,000 to your U.S. citizen child at or after your expatriation. The kid would have to pay $34,400 of your gift in taxes to the IRS (($100,000 – $14,000) X .40). Normally, there wouldn’t be any tax at all unless you exceeded your lifetime limit, and even then, the tax would be less — and you’d pay it, not your child.
Even on the Way Out, You’ll Need an Attorney
The U.S. has more lawyers per 100,000 persons than any other country on the planet. From birth to death, we rely on them to navigate the perilous waters of both private and public regulation and litigation. Failing to use an attorney can cost you, either by failing to comply with little-known rules or by failing to take advantage of similarly hidden opportunities.
Expatriation is no exception. If you ever decide that you want to take this step, you will need a good attorney who specializes in these matters. For example, the calculation of your exit tax will involve applying short-term capital gains rates to some assets and long-term rates to others. And there are ways to reduce gift and estate taxes, too.
There are plenty of reasons to expatriate in addition to the outrageous U.S. tax system. Over the last several years, we’ve watched the decimation of our privacy, the reduction of our civil liberties, the militarization of our police forces and the looming threat of a wealth confiscation as our country wallows in debt. Whatever yours might be, if and when you do, make sure you get help from the experts, such as those on our Offshore Confidential “Rolodex”.
You’ll be glad you did.
Offshore and Asset Protection Editor
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