Taxes Cause U.S. Citizens to Renounce Citizenship in Record Numbers

In the fourth quarter of 2009, 502 U.S. citizens took an extraordinary step… they made the decision to permanently renounce citizenship in the U.S. and become expatriates.

That doesn’t seem like a large number, but it is more than double the number of all such expatriations in 2008.

Something is happening, and organizations of expatriates around the world say that it’s a growing dissatisfaction with the way the U.S. government treats citizens living abroad.

The U.S. is unique among industrialized countries in being the only one that taxes its citizens who live and work overseas, in many cases subjecting them to double taxation in both the country they reside in and their country of citizenship.

This has a huge impact, because there are an estimated three to six million U.S. citizens currently living abroad. And they’re wondering why the U.S. government should get a piece of income and wealth they generate outside the U.S.

Add to that the recent addition of tough rules and heavy fines involving the reporting foreign bank accounts, and the dissatisfaction among U.S. citizens living abroad is growing daily. The intention of the regulations is supposedly catching tax cheats and uncovering illegal terrorist money laundering, but simple mistakes or honest oversights by otherwise law-abiding citizens can result in fines and penalties that can evaporate life savings and ruin lives.

The new regulations also make foreign banks reluctant to deal with U.S. customers, and citizens living abroad often find that they are denied services by foreign banks simply because they are U.S. citizens and banks don’t want to deal with the ever-increasingly labyrinth of rules, regulations, and reporting requirements that come with U.S. customers.

Giving up U.S. citizenship is a fairly easy, but it’s irrevocable. An expatriate can’t simply change his or her mind and ask for citizenship to be reinstated. A new law also requires people renouncing citizenship to pay an exit tax levied on worldwide income and assets.

Even given these hurdles, many people don’t see the economic sense of remaining U.S. citizens under the current tax structure, resulting in more citizens than ever taking the extraordinary step of renouncing citizenship completely.

It seems that there are those who are seeking the reality of a dream life abroad personified by some 105,000 Americans living in the Philippines for example.

There are those who have relocated for employment and career opportunities like the 224,000 who now reside in the UK, and there are those who are so dissatisfied with the political climate in American right now personified by the 688,000 Americans living in Canada.

On the positive side - the numbers of migrants leaving the US in search of a brand new life abroad have been increasing steadily since around 1910 as a result of more wealth, better transport links and an American’s natural desire to travel and explore. Therefore it is not now a case of all 4 million American expatriates having fallen out of love with America - some have simply fallen in love with a foreigner, a country, a lifestyle, some left with the intention of returning but established roots elsewhere. And most American expatriates are able to embrace their new country whilst retaining their nationality; after all, America’s influence is almost global because American citizens never truly leave their nation behind!

On the negative side - there is a growing feeling of disillusionment prevalent in the US today, and as this feeling intensifies so the numbers of citizens seeking out an overseas haven away from the glare of big brother and away from the aggressive and conservative political situation increases. Those leaving today are leaving for the same reasons as the ‘Lost Generation’ left back in 1918. Following the end of the First World War record numbers of Americans began leaving the US to escape their nation’s restrictions, the horrors of war and America’s ultra conservatism…between 1910 and 1920 the numbers of US citizens who fled abroad more than doubled from 55,608 in 1910 to 117,238 by 1920…today that figure now stands at 4 million.

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American Expatriats Renouncing Citizenship in Greater Numbers

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship.

“What we have seen is a substantial change in mentality among the overseas community in the past two years,” said Jackie Bugnion, director of American Citizens Abroad, an advocacy group based in Geneva.

“Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.”

The Federal Register , the government publication that records such decisions, shows that 502 expatriates gave up their U.S. citizenship or permanent residency status in the last quarter of 2009.

That is a tiny portion of the 5.2 million Americans estimated by the State Department to be living abroad.

Still, 502 was the largest quarterly figure in years, more than twice the total for all of 2008, and it looms larger, given how agonizing the decision can be.

There were 235 renunciations in 2008 and 743 last year. Waiting periods to meet with consular officers to formalize renunciations have grown.

Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge.

Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.

One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years.

She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps.

Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said.

“I loved my time in the Marines, and the U.S. is still a great country,” she said, in this article in the New York Times.

“But having lived here 20 years and having to pay and file while seeing other countries’ nationals not having to do that, I just think it’s grossly unfair.”

“It’s taxation without representation,” she added.

Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups —

have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.

Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

“It seems the new anti-terrorist rules are having unintended effects,” Daniel Flynn, who lives in Belgium,

wrote in a letter quoted by the Americans Abroad Caucus in the U.S. Congress in correspondence with the Treasury Department.

“I was born in San Francisco in 1939, served my country as an army officer from 1961 to 1963, have been paying U.S. income taxes for 57 years, since 1952, have continually maintained federal voting residence, and hold a valid American passport.”

Mr. Flynn had held an account with a U.S. bank for 44 years.

Still, he wrote, “they said that the new anti-terrorism rules required them to close our account because of our address outside the U.S.”

Kathleen Rittenhouse, who lives in Canada, wrote that until she encountered a similar problem,

“I did not know that the Patriot Act placed me in the same category as terrorists, arms dealers and money launderers.”

Andy Sundberg, another director of American Citizens Abroad, said, “These banks are closing our accounts as acts of prudent self-defense.”

But the result, he said, is that expats have become “toxic citizens.”

The Americans Abroad Caucus, headed by Representative Carolyn B. Maloney, Democrat of New York, and Representative Joe Wilson, Republican of South Carolina, has made repeated entreaties to the Treasury Department.

In response, Treasury Secretary Timothy F. Geithner wrote Ms. Maloney on Feb. 24 that

“nothing in U.S. financial law and regulation should make it impossible for Americans living abroad to access financial services here in the United States.”

But banks, Treasury officials note, are free to ignore that advice.

“That Americans living overseas are being denied banking services in U.S. banks, and increasingly in foreign banks, is unacceptable,”

Ms. Maloney said in a letter Friday to leaders of the House Financial Services Committee, requesting a hearing on the question.

Mr. Wilson, joining her request, said that pleas from expats for relief “continue to come in at a startling rate.”

Relinquishing citizenship is relatively simple.

The person must appear before a U.S. consular or diplomatic official in a foreign country and sign a renunciation oath.

This does not allow a person to escape old tax bills or military obligations.

Now, expats’ representatives fear renunciations will become more common.

“It is a sad outcome,” Ms. Bugnion said, “but I personally feel that we are now seeing only the tip of the iceberg.”

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