Reuters article about expatriation; I am mentioned

ByPhil Hodgen Published Latest Update

Atossa Araxia Abrahimian, writing for Reuters, has a good story up about U.S. citizens who give up their citizenship.  The article points directly at some of the important tax reasons for expatriation:  the paperwork burden is ridiculous and there is a high probability for innocent mistakes that trigger massive penalties.  Noncitizen spouses see no reason to share personal information with the U.S. government.

There are some real-world people making real-world decisions.  For those who reflexively think “Traitor!” when they hear of someone canceling U.S. citizenship, this article might be eye-opening.

In short, the cost of U.S. citizenship has gone up.  It is no surprise that an increasing number of people are choosing to drop the passport.  Price up?  Fewer buyers.  Simple.

Our firm does a lot of this type of work.  We log people out of the citizenship system, then log them out of the tax system.  It’s one of the reasons I am on a plane every 7 or 8 weeks to somewhere or another.  (I will be in Switzerland May 20-25, Beirut May 27-29, and Dubai May 30-June 3.  Meet me.  Text or email me to set something up.)

A word for those who are considering this major life step.  I do not think it is smart to let tax considerations drive major life decisions.  You are on the planet once.  Then you die.  Don’t be rash.  Go.  Live there (wherever “there” is for you) for a couple of years and hang on to your U.S. passport.  See if you like it.  Simplify your life so you can simplify your taxes.  Cross your fingers and hope you can open a bank account.  🙂

In my experience, this is not a step for everyone.  But for many, it is a staggeringly obvious choice to make.  As the IRS — through increased regulations, obtuse paperwork, and not-so-smart tax policing — continues to bull its way through the great china shop of life, I expect to see the number of expatriates continue to climb. 

(Oh, by the way, in the shameless self-pimping department, let me just point out that Atossa was kind enough to give me a shout-out in the article.  Thanks Atossa).

And one more thing.  Let’s abuse one more bias commonly held about expatriation.  (A bias especially prevalent among politicians, it seems).  Did you notice in the article that the people interviewed are living in high-tax countries, both for income tax and death taxes?  Isn’t that interesting . . . .

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Phil Hodgen

Philip D. W. Hodgen is the principal attorney of HodgenLaw PC, an international tax law firm based in Pasadena, California. He earned his undergraduate degree from Claremont McKenna College and his law degree from the School of Law at the University of California, Los Angeles. He then went on to earn a Master of Laws degree with a specialty in taxation from the University of San Diego School of Law. Admitted to the California bar in 1982, Phil spent nine years in law firms and with a large U.S. bank before starting his own firm in 1991.
Phil is a past chair of the International Tax Committee of the State Bar of California's Tax Section and was a member of the Executive Committee of the State Bar of California's Tax Section for 2004-2007. Phil frequently speaks on a variety of international tax, trust and estate topics to attorneys, accountants, and real estate professionals.

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10 Comments

  1. @Michael Miller. This is truly an interesting story, and a cautionary tale. I think that the obvious conclusion is this. Divest yourself of certain kinds of US assets before expatriating. Or, if that’s too costly, then do not expatriate after all.

    Fortunately, many of us US citizens abroad really have cut off ties with the United States. Many of us own no property there, engage in no business there, have no bank accounts there, etc. I myself do have two small 401k’s (actually 403b’s, but they’re similar) in the US, totally $25,000. I understand that there will be a withholding tax of 30% when I withdraw on these, but I’ll get a tax credit in Canada to offset that withholding tax. And, in the meantime, I’ll be able to open a TFSA, I’ll be able to start an RESP for any kids I have (I just got married and we are planning a family), etc.

    But thanks for the story. It’s nice to have people out there cautioning us in an appropriate way!

  2. One note of caution. It is possible to be WORSE off by reason of having expatriated. I have a client who (prior to consulting me) gave up her US citizenship, and whose principal asset is approx. $1M of US real property. Absent the expatriation, she could hold the property until her death, use her lifetime exemption from gift and estate tax (currently $5M, but that number is subject to change) and then her son would get a stepped-up cost basis allowing him to sell after her death at no gain. So if she hadn’t expatriated, the result would be no estate tax and, ultimately, no income tax.

    Since she expatriated, the lifetime exemption from US gift and estate tax does not apply, so if she died owning the property there would be an estate tax. She could avoid the estate tax by selling, but then we’d have income tax. Right now, she’s consulting an immigration attorney to see if the problem can be solved by reacquiring her US citizenship. I assume everyone’s stomach is now turning at the thought of someone reacquiring (!) US citizenship!

  5. Peter. I admire you. Atossa’s article is an oasis in a desert of threats, criminal prosecutions and taxes on innocent people. The main reason why an American Abroad may not declare his investments in the country where he is living and working is…fear of the paper work and the fees of CPAs and Lawyers. Because they have no reason to hide anything. First they have the earned income exclusion and then they have the tax credits. It may be in some cases that they would have to pay a difference between taxes where they reside and the USA. But this is it. It seems to me that they are being trapped into this in order for the USA to collect money. It is a shame. I bet the majority of Americans Abroad do not know about FBARS yet…and are heading for slepless nights, fear and anger.

  6. It is a weird thing to congratulate someone for. Losing my citizenship means I don’t have the right to live in the United States any more. It’s a loss. But it is not so strange when we consider it means freedom from an oppressive tax system, that would violate the spirit of the tax treaty between Canada and the United States. This was about being able to enjoy a TFSA, something that the IRS says that no US person who lives in Canada may do.

  7. @Peter

    I saw the blog post today. Congratulations.

    There is some kind of underwhelming majesty to these bureaucratic pieces of paper. They signify a momentous event, and attempt to somehow convey that aesthetically. Yet they’re still way cool to look at.

    I hope you are going to frame it and put it on the wall. It’s a great souvenir.

    I asked my wife to marry me over a dinner, long ago. At the end of the dinner I snagged the check and had it framed. It’s nice to look at it, even though the restaurant is long gone. (The wife is still with me. Good thing!)

  8. Phil: good advice for those who currently live in the United States. Of course, I haven’t lived in the United States since 1986, and my life here is in Canada. That is why my checking out of the system was non-brainer for the state department. As I reported at Isaac Brock, my CLN arrived today.

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