With 2,999 people renouncing their U.S. citizenship in 2013 and an estimated 4000 or more renouncing it in 2014, it seems that slowly, more and more people are starting to see the disadvantages of having U.S. citizenship. In fact, these numbers aren’t that accurate, with only people who are paying the exit tax being reported, making the number much, much higher in reality.
If you’ve been thinking about your career and your personal future, the subject of holding or renouncing your U.S. citizenship has probably come up. There are both opportunities and disadvantages to having a U.S. citizenship and we will try to cover the topic from both sides.
Let’s start with the disadvantages first, since these are the most obvious in the long-term.
Military draft. Although the U.S. military is voluntary, the Selective Service System still remains, meaning that men between the age of 18 to 25 of age can be drafted anytime in case of emergency. Realistically speaking, a full-blown U.S. military conflict isn’t going to happen anytime soon so the chances of being drafted are low to non-existent. It could be argued that this point is not even that important since many other countries have a similar contingency plan in place.
Global income tax. The United States is the only country in the world where citizens have to pay taxes regardless of where they live. This means that if you work in Germany, Cambodia or any other place, you still have to pay taxes on the income you make in that country as if you were working in the U.S. This means that you are being taxed doubly: both in the country of residence and in the U.S. There are some tax breaks for double taxation but it is still costly, both financially and emotionally, to pay taxes to the U.S. even when you don’t make your income there.
To make things even harder, the U.S. government does not differentiate between those who earn abroad and at home. If you’re a Canadian for example, the ways you can save up for retirement encouraged in Canada are heavily fined under U.S. laws. Financial planning in this regard becomes very difficult, if not downright impossible. To top it off, there are very few legal experts that are intimately familiar with this subject, which makes getting help even harder.
Reporting all financial information to the IRS. Not only will you have to file tax returns, but you will also have to file all personal financial information to the IRS. Any kind of financial account that you have signing power of, you will have to file a report on it. Basically, any financial activity that you are engaged in, you must tell the U.S. government about it. If you value your privacy, you can say goodbye to it because the law requires you to tell all. If you fail to do so, expect to pay some exorbitant penalties.
If you have a joint account with your spouse, you will have to disclose it. Any partnerships or shares you own in foreign companies, you will have to disclose as well. Because of this, when it comes to business abroad, many non-U.S. citizens won’t be exactly jumping at the idea of having you as a partner. In addition to this, filing these forms takes time and you will have to have an experienced accountant or lawyer assist you with them; this takes time and money.
Non-Employment Opportunities in Foreign Companies. Non-U.S. companies are starting to have second thoughts when it comes to hiring U.S. employees, not only because of the high taxes they have to pay, but also because of the possibility of them having to disclose financial company data to the IRS. Being a U.S. citizen and working in a foreign company means that you are obligated by law to disclose to the IRS private financial information of non-U.S. citizens. It’s not hard to see then why a company would be uncomfortable with hiring you. U.S. citizenship is another hindrance in this regard.
Other things to keep in mind:
- Being a U.S. citizen will prevent you from investing in foreign, non-U.S. investments;
- You won’t be able to use a business corporation to hold your investments;
- U.S. estate and gift taxes still apply wherever you go;
- If you’re going to marry a non-U.S. citizen and you’re going to have a joint bank account, you will have to report your spouse’s information to the IRS. In addition to this, they won’t be able to automatically inherit your family estate in case of your death.
Is it all bad?
While it’s true that there are disadvantages to having U.S. citizenship, there may be certain advantages as well. For example, there are investments that can be entered only by U.S. citizens and some businesses will accept only U.S. citizens as partners. When hiring, U.S. companies generally look for U.S. citizens first. This can be another advantage if you’re looking for work back at home.
Keep in mind that these things are only possibilities not actual laws. While you may or may not get partnership in a U.S. business, it is a fact that you must file tax returns to the IRS, no matter where you are in the world.
Now the Government has raised the “exit tax”, which one has to pay for renouncing U.S. citizenship, to $2,350 from $450. If you have a net worth of at least $2 million or your average annual net income tax for the past 5 years is $157,000 or more for 2014, then you will have to pay the exit tax, which acts the same as a capital gain tax, meaning that you have to pay taxes as if you sold your property the day before becoming an expatriate.
Hopefully this article has cleared up some of the pros and cons of having a U.S. citizenship and why more and more people are looking to renounce it. We don’t think that the U.S. is bad place to live in, but if you’re a citizen and you’re not working in the U.S., you might already be looking for ways to minimize the taxes you pay.