US Expats have long sought tax relief. One law motivating some is the Foreign Account Tax Compliance Act (FATCA). FATCA has been ramped up worldwide, and requiring an annual Form 8938 filing if your foreign assets meet a certain dollar amount. What is FATCA?
FATCA was enacted in 2010 and has been implemented worldwide by the U.S. Treasury Department. It now spans the globe with an unparalleled network of reporting. America requires foreign banks and governments to report bank data about depositors. Non-U.S. banks and financial institutions around the world are requested to convey American account details or risk large penalties. Some US Expats renounce because of global tax reporting and FATCA. America’s global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Their American status can make them untouchable by many banks.
Americans living and working abroad must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income. A foreign tax credit often does not eliminate double taxes. Moreover, enforcement fears are palpable for the annual Foreign Bank Account Reports (FBARs). They carry large civil and even potential criminal penalties. The civil penalties alone can consume the entire balance of an account.
Ironically, even leaving the United States can be costly. America charges $2,350 to hand in your passport. Moreover, to exit, one generally must prove 5 years of IRS tax compliance. And getting into IRS compliance can be expensive and worrisome. For some, a reason to get into compliance is to renounce.
Additionally, if you have a net worth greater than $2 million, or have average annual net income tax for the 5 previous years of $162,000 or more, you can pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left. A long-term resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but the tax worry can be real, even for those who will not face it.
If you are intending to renounce your U.S. citizenship or terminate your long-term U.S. residency, careful pre-expatriation planning should take place in order to mitigate any negative tax consequences. This is especially true for taxpayers who have sufficient net worth to be treated as covered expatriates.
Post-expatriation planning should also take place even if you are not a covered expatriate as your estate planning documents (e.g. wills) may need to be revised to reflect your new non-resident alien status.
To discuss this article and how it affects you, please contact Grant Thornton.