April 11, 2012 - Phil Hodgen

Another expatriation driven by U.S. tax complexity

I received an email this morning.  Someone I’ve been working with for several months.  He has sent in all of his paperwork to terminate his green card. 


At the moment he is a resident of a high-tax European country.  He has no U.S. tax exposure since he pays more in tax there than he would pay in the United States.  So he’s not doing this to save income tax.  This is the common assumption:  that people leave the USA to avoid paying tax.  My experience is quite the contrary.  This gent is typical.

His business takes him back and forth from Europe to the United States and it would be exceedingly valuable for him to remain a green card holder.  Yet today he sent in the forms to cancel it.

Why He’s Bailing Out

Here’s why.  Paperwork.  The cost and complexity of U.S. tax returns for American taxpayers abroad is insane on stilts.  If he has mutual funds, he has Form 8621 problems.  Things that are tax-free in his current country of residence are not necessarily tax-free in the USA.  And in fact you can usually guarantee that Uncle Sam wants a piece of it.  While the tax load can usually be eliminated in the USA (because he pays so much income tax abroad) it is still messy and adds complexity and cost to his U.S. tax return.

But what really kicked it off was a business opportunity.  He has the opportunity to enter into a startup business with some friends.  Because he is a U.S. taxpayer, the tax compliance costs are monstrous.  If they use a corporation, he has a Form 5471 problem.  If they use a partnership, he is a U.S. taxpayer with an interest in a foreign partnership.  He has FBAR and Form 8938 problems.  The financial structure of the proposed startup was optimized for the European tax/fiscal landscape, but worked very badly indeed for US purposes.

So, faced with the alternative of about $10,000 of U.S. tax advice (and possible loss of his startup business opportunity) vs. giving up the green card, he chose the obvious one.  Give up the green card and cut ties with the United States.

Paperwork Burden, Not Tax Cost Burden

I want to be crystal clear. This is an important point: 

    • – He is paying a metric ton in tax.
    • – It is annual compliance cost of dealing with CFC, PFIC, foreign tax credit, foreign earned income exclusion, and the like that really gripes him.
  • – The U.S. tax complexities would force him to lose an opportunity to participate in a startup business.  His tax situation is so anomalous compared to the other participants that he would either have to absorb enormous compliance costs himself, or be barred from participating in the business as too much trouble.

So there you have it.  A person who gets things done.  Who builds businesses.  He’s been pushed out of the USA because of U.S. tax compliance burdens.  Not U.S. tax.  U.S. paperwork.

Heads-up to Atossa

@atossaaraxia, if you’re reading this, it is exactly what we talked about yesterday.  This is on top of two consultations yesterday that I did with people to explore the expatriation avenue.  One will definitely do this, and the other might (and she should expatriate; she’s just not sure yet).

The person I talked to yesterday came to the USA as a student in her teens.  Repeatedly told me she loves the people and the country.  But . . . the tax paperwork crap.  She ends up paying very little tax after the foreign tax credit and the foreign earned income exclusion.  It’s the paperwork burden and frankly the fear factor engendered by the current regime in Washington DC that caused both of my appointments yesterday to take this dramatic step.

Three in two days.  I must say this is not an uncommon situation for me.

And it’s sad.  My parents were immigrants.  They came to the USA in 1951 as students and stayed.  Tax PAPERWORK policy and tax ENFORCEMENT policy is driving people away.  Not tax COST.

EDIT: Two new expatriation clients today. It’s 10:36 a.m.