Why You Might Want to Renounce US Citizenship

Why You Might Want to Renounce US Citizenship
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As part of my work, I’m a member of half-dozen Facebook groups devoted to financial issues for US expats. And I’m starting to pick up a trend.

Typically, these chat groups focus on issues like how to file taxes from abroad, what to do if you “forgot” to do so for 20 or so years, and how to trick US financial and other institutions into thinking you still live in the US. In other words, all the standard US expat stuff we deal with every day.

Lately, however, I've seen a big uptick in the number of people planning to “expatriate” from the United States. Expatriation is the legal process of renouncing your US citizenship altogether, so that you no longer have any tax obligations to the country.

In fact, expatriation is the only way US taxpayer can avoid tax obligations. As I like to say, taxation attaches to Americans like original sin. That's because unlike almost every other country in the world—Eritrea and North Korea are the others—the United States taxes Americans on their global income, no matter where they live and where they earn their money.

For those of us who've gotten used to this, it might be difficult to imagine the position it puts some people in. Consider the case of Rob Gerresten.

According to a recent article in Bloomberg, Rob was born 67 years ago to Dutch parents who happened to be in the US at the time. He has lived in the Netherlands for the last 66 years. He has never set foot in the US and has no connection to the country.

For the past 11 years, however, he’s been fighting his local bank in the Netherlands which has been trying to shut down his account. That’s because he can’t provide a US Social Security number. And that is because he doesn’t have one.

Under the Foreign Account Tax Compliance Act, or FATCA, foreign banks must report the existence and details of accounts owned by US citizens. (Of course, the US can’t make laws for foreign banks, but the threat of exclusion from the global financial system Is a good substitute.) Gerresten’s local bank doesn’t want to get in trouble with the US Treasury Department, and servicing a client like him isn’t worth the risk. So, after years of doing business with him, they suddenly told him to take a hike.

There’s no way to know how many “accidental” Americans like Rob there are around the world. But since the US grants automatic citizenship to anyone born on US territory, there are more than you might imagine. One of the most famous was former UK prime Minister Boris Johnson, who renounced his US citizenship when confronted with an enormous capital gains tax arising from the sale of one of his properties in London.

But accidental Americans aren’t the only ones who find it more advantageous to ditch US citizenship than to keep it. Many Americans who’ve settled abroad or married foreigners are finding that the costs and hassles of complying with US tax and banking regulations aren’t worth it.

Recent regulatory changes to the process of expatriation have apparently opened the floodgates.

Currently, to renounce US citizenship, you must pay a State Department fee of $2,350. For people of limited means with no connection to the US, that’s a great deal of money. So, an advocacy organization for US expats sued the State Department in 2020 to have the fee reduced.

When COVID hit, the case fell by the wayside. (To make matters worse, the State Department stopped processing expatriation applications for two years whilst the pandemic raged.) But recently the government proposed to reduce the fee to $450, which was the original amount before it was raised to the current price in 2014.

As news of the proposed price change has circulated amongst the US expat community—both accidental and otherwise—people are talking excitedly about giving up their blue American travel document. The Facebook groups are a front row seat to this max exodus to the metaphorical doors that lead out of the United States forever.

To most Americans living inside the country, this probably seems like an extreme step. But the number of people voluntarily renouncing their US citizenship has been rising by double digits every year for more than a decade. Most of them are high net worth people trying to avoid paying US income tax but it also includes many people who are just sick and tired of the hassles of trying to comply with the world’s most complicated tax filing system.

The process of expatriation isn’t as complicated as you might think. And for many, expats and accidental Americans alike, it can be worth consideration.

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