Expats Frustrated With Taxes Consider Renouncing US Citizenship

Another survey by a tax company. Some interesting demographics (by and large, more “middle class” than very affluent):

Around 9 million U.S. citizens are currently living abroad, according to estimates by the U.S. State Department. Many of these “expats” have cultivated more permanent lives overseas, with established careers, relationships, and community ties. A new studyfrom Greenback Expat Tax Services sheds more light on some of the key aspects of life abroad and why many expats are now considering renouncing their U.S. citizenship.

Greenback, a tax services provider for Americans living abroad, releases a survey on expat life each year. For 2022, the company surveyed 3,200 U.S. citizens living in 121 different countries on various aspects of their professional, financial, and social lives. A majority of those surveyed were over the age of 65, and 34% had spent more than 20 years living outside of the U.S..

In addition to these demographic details, the survey also included questions on employment and income. 31% of surveyed respondents were employed by a large organization (of 250 or more people), and half reported an annual income below $100,000. When asked how the COVID-19 pandemic had impacted their careers, the majority expressed plans to work remotely at least part time moving forward.

Overall, the biggest point of contention for those surveyed was navigating U.S. taxes while living abroad. While most countries tax based on resident status, the U.S. government follows a citizenship-based taxation process. Under a citizenship-based system, all citizens are taxed under the same personal income tax system, regardless of where they live. American expats therefore must pay U.S. income taxes on any worldwide income, including salaries, investment earnings, and more. With this system in place, many U.S. citizens living abroad are required to pay U.S. taxes and taxes in their host country each year.

In addition to tax filings, some U.S. citizens may be required to report foreign accounts to the U.S. Department of the Treasury, depending on the total value of their accounts. Reporting foreign accounts is a lesser-known requirement often overlooked by expats as they navigate life abroad, and failure to do so can result in serious financial penalties.

Greenback’s survey reported that many expats find it difficult to navigate the U.S. government’s tax and financial requirements, and nearly 80% don’t believe they should have to pay U.S. taxes while living overseas. As a result of these frustrations, about one in four have “seriously considered” renouncing their U.S. citizenship. For those considering citizenship renunciation, the burden of U.S. taxes and a host of other political and personal motivations were cited.

Giving up one’s U.S. citizenship can be a complicated process and it does come with a price tag. Any individual officially renouncing their citizenship must pay a $2,350 fee to the State Department, and some with higher net worths may be required to pay an “exit fee” based on their worldwide assets. The State Department also warns against renouncing strictly for tax purposes, stating “persons who wish to renounce U.S. citizenship should be aware of the fact that renunciation of U.S. citizenship may have no effect on their U.S. tax or military service obligations.”

Source: Expats Frustrated With Taxes Consider Renouncing US Citizenship

What to consider when deciding to renounce U.S. citizenship for tax purposes

Interesting to see this practical guide in the Globe, says something about the readership. And a reminder of issues related to citizenship-based taxation in the USA and residency-based taxation in most of the world:

For Americans looking to give up their U.S. citizenship, the decision isn’t just about national identity but also how much taxes they might have to pay when leaving the country officially.

While an American who renounces their citizenship will no longer have to pay U.S. taxes on their worldwide income, they could be forced to pay an expatriation tax, also known as an exit tax, upon departure, depending on their net worth and other rules the Internal Revenue Service (IRS) has laid out.

“You can’t just hand your passport to the border agent and say, ‘I’m done,’” says Darren Coleman, senior portfolio manager with Portage Cross Border Wealth Management at Raymond James Ltd. in Toronto. “There’s a lot more to it than that.”

Mr. Coleman says advisors should be discussing with their American-citizen clientele the various steps of renunciation – and ensuring they have the proper legal and tax expertise when going through the process.

“You really can’t make any mistakes when you do it,” he says.

For advisors looking to help clients make the move, the goal is to not be considered what’s known as a “covered expatriate” in order to avoid paying the exit tax – a U.S. federal tax on assets with unrealized gains at the time someone cuts ties with the U.S.

Additional U.S. withholding taxes can apply later to payments from some types of deferred compensation arrangements, accounts and trusts, says Steven Flynn, a partner and Canadian and U.S. cross-border tax expert at Andersen LLP in Vancouver.

Americans can avoid the exit tax if they meet three conditions on the official date of expatriation:

  1. Their average annual net income over the past five years is less than US$172,000 (as of 2021, the rate changes annually with inflation);
  2. They’re fully compliant with their U.S. tax obligations for those five years;
  3. Their net worth is US$2-million or less.

With some planning, Mr. Flynn says the first two conditions are relatively easy to meet for those looking to avoid the exit tax.

However, the third condition on net worth can be a hurdle for many Americans, especially those who are older and whose assets have increased in value over the years.

Mr. Flynn also notes that since the conditions were put in place in 2008, the US$2-million threshold hasn’t increased with inflation.

He adds that Americans can still use strategies to lower their net worth, such as gifting assets to family members while they’re still U.S. citizens. Although the U.S. has a gift tax, he notes the exemption is currently about US$12-million, which is set to be reduced significantly by 2026.

Still, Americans who renounce their citizenship successfully but as a covered expatriate may not be done with the U.S. tax system, Mr. Flynn says. Any U.S. person who receives a gift or is a beneficiary of a former U.S. citizen who is a covered expatriate in their will is still subject to a 40-per-cent tax on the value of those assets.

“That’s pretty significant,” he says, “and a real concern for people with U.S. citizen or resident children.”

Importance of reason for renunciation

Alexander Marino, leader of the U.S. tax practice at Moodys Tax Law in Calgary who runs the firm’s renunciation group in Canada, saw a record number of people looking to renounce during the pandemic, in part because people more had time to go through the lengthy process.

The steps include not only working with experts to determine if renouncing is the right decision but also filing and addressing reams of paperwork before the final step of meeting in person with a consular officer at a U.S. embassy or consulate to officially renunciate.

In addition, Mr. Marino says U.S. persons need to ensure they’re communicating their reasons for renunciation properly, especially if they have plans to return as a visitor.

He points to the Reed Amendment, also known as the Expatriate Exclusion Clause, which bans certain former U.S. citizens from re-entering the country if they’re considered to have renounced for a tax avoidance motive or purpose.

“Knowing what to say in the interview is critical,” he says.

Mr. Marino says advisors also need to be aware of these issues to protect their clients – and themselves. He notes advisors have an obligation to identify who their U.S. citizen clients are under the Foreign Account Tax Compliance Act in Canada (FATCA), an international agreement signed between Canada and the U.S.

His team at Moodys works with advisors to help them determine if clients are U.S. citizens, particularly as some may not realize it or understand the impact of not disclosing it. For example, he says some people may have lived in Canada their entire lives but have American parents, which means they’re also U.S. citizens.

“You need to be asking the right questions,” he says.

Once it’s clarified if a client is a U.S. citizen, Mr. Marino says advisors can work with them – with the help of their U.S. legal professionals – to decide the pros and cons of renunciation. The process includes strategies to reduce or avoid the U.S. exit tax altogether when cutting ties with “Uncle Sam” properly.

Mr. Flynn adds that there are also non-tax implications to renunciation.

“If you change your mind years later, you’re not going to get any special status just because you were a U.S. citizen before,” he says. “You’ll go to the back of the line, like everyone else trying to become a U.S. citizen.”

The U.S. government publishes the names of Americans who renunciate, he adds.

Mr. Flynn also says that Americans who renunciate are still subject to taxes on assets or income made in the U.S., similar to a Canadian who works or owns assets in the U.S.

“The difference is that you avoid the bigger net, which is on your worldwide income and worldwide assets because you’re no longer a U.S. citizen,” he says.

Source: What to consider when deciding to renounce U.S. citizenship for tax purposes

FATCA: U.S. tax rules raising the stakes for Canadian residents with American citizenship

The ongoing saga of compliance with US tax law and Foreign Account Tax Compliance Act (FATCA) following the end of the grace period January 1:

Many Canadian residents with U.S. citizenship could risk fines or the closure of their banking or investment accounts in the coming months if they don’t provide financial institutions with U.S. identification numbers, officials warn.

Experts say that in some cases, financial institutions may close accounts rather than face fines for not providing U.S. social security or taxpayer identification numbers for clients who could be subject to U.S. income tax, such as dual citizens.

That means the stakes are about to get higher for those who haven’t been filing returns and for “accidental Americans” — Canadians with U.S. citizenship (from being born in the U.S. or to an American parent) who did not realize that, as American citizens, they’re obliged to file U.S. tax returns.

The changes won’t affect those who are already filing income tax returns to both Canada and the United States and who already have provided their financial institutions with U.S. identification numbers.Unlike most countries, which levy income tax based on where taxpayers live, the United States requires all those with U.S. citizenship to file income tax returns, regardless of where they live or how much time they’ve spent in the U.S.

The Canada Revenue Agency, not the U.S. Internal Revenue Service, will be enforcing the requirement and levying any fines.

How FACTA works

In 2010, the United States adopted the controversial Foreign Account Tax Compliance Act (FATCA) in a bid to curb offshore tax evasion. Under FATCA, financial institutions outside the United States are obliged to search their files for customers who could be subject to U.S. income tax and report information about those accounts.

Former prime minister Stephen Harper’s government negotiated an agreement that tasks the Canada Revenue Agency with collecting that information from financial institutions for the IRS.

In September 2019, the CRA sent 900,000 financial records belonging to Canadian residents to the IRS — nearly a third more than it sent the previous year. The records were for the 2018 tax year.

The arrangement with the IRS included a ‘grace period’ that allowed financial institutions to send on records that were missing valid U.S. social security numbers or taxpayer identification numbers (TINs) without being fined. That grace period ended Jan. 1.

The CRA says it expects the records it receives from banks, mutual funds, credit unions and other institutions for the 2020 tax year to include that information. Those records will be sent to the IRS in September, 2021.

CRA has authority to fine

If the social security or taxpayer identification number is missing or invalid, the IRS would flag it to the CRA and the CRA would notify the financial institution, which would have 120 days to get the information. The CRA has the authority to levy fines for non-compliance, although it can also exercise discretion. Officials said that there would be an 18-month delay before the CRA issued a notice of non-compliance to a financial institution.

Canada Revenue Agency officials held a meeting Jan. 29 with more than 200 representatives of financial institutions to discuss a proposed guidance document on how they should proceed. Some industry insiders said they expect that guidance, which should be out by the end of March, to say financial institutions can close accounts if they can’t get the information after making reasonable efforts.

No one seems to know how many Canadian residents’ tax files are missing the relevant information. The CRA says it doesn’t know how many files it has transmitted to the IRS without the identifying information and that its compliance efforts are in the early stages.

The CRA and financial institutions are not obliged to inform account holders before their records are shared with the IRS. That means many Canadian account holders may not know that information about their banking or investment accounts is already in the hands of the IRS.

Higher stakes in Canada

Mathieu Labreche, spokesman for the Canadian Bankers Association, said the association is waiting for more information from the CRA before commenting. He said the banks send to the CRA only what Canadian law requires.

Alexandra Jacobs of the Canadian Credit Union Association said the association is working with stakeholders to ensure that credit unions meet their compliance obligations.

Grace Pereira is senior counsel with the BLG law firm in Toronto, specializing in advising investment funds. She said the stakes are higher in Canada than in many other countries.

“We did have the largest number of accounts with missing TINs,” she said. “I think we’re in this lull where we don’t know what is going to happen to those particular account holders.

“I have a lot of empathy for the financial institutions because, at the end of the day, how can they force somebody to get a Taxpayer Identification Number? … Which is essentially sticking up your hand and saying, ‘Yeah, I’ve not been complying for all these years.'”

Kevyn Nightingale, a partner with the accounting firm MNP, said his contacts in financial institutions have told him that they’re already implementing the new rules. He said he expects banks to start refusing to open accounts for those who may be subject to U.S. income tax but who can’t provide a taxpayer identification number.

“The big guys, to my understanding, have not turned people away yet, but I wouldn’t be surprised if that’s ultimately where they go because it’s just easier to do that than deal with the hassle of a recalcitrant U.S. taxpayer,” he said.He said some institutions could accept a client while remitting money to the IRS on the account holder’s behalf, said Nightingale.

While income taxes paid in Canada usually wipe out the taxes due in the U.S., Nightingale said the two systems have different provisions and individuals sometimes still end up owing U.S. tax.

“The choice is now down to either lying about your U.S. status to the financial institutions that you deal with or telling the truth,” he said. “If you tell the truth and don’t provide a social security number, you’re either going to have withholding or they simply won’t accept you. If you provide a social security number, then eventually you’re going to get letters from the IRS that will become gradually more and more insistent.

“And if you continue to ignore those, then it may no longer be feasible to enter the United States.”

Nightingale said the IRS has a program for those who didn’t realize they were supposed to file U.S. income tax returns. Under the program, a taxpayer can come back into compliance by filing three years worth of tax returns and six years of Foreign Bank and Financial Accounts reports.

Source: U.S. tax rules raising the stakes for Canadian residents with American citizenship

Americans Line Up to Renounce US Citizenship in Toronto

More on the US FATCA and impact on Canadians:

Canada finalized its IGA earlier this year. It requires Canadian banks send the account information of customers with U.S. citizenship to the Canada Revenue Agency CRA. The CRA then forwards that information on to the IRS, a tidy workaround to Canadian laws forbidding banks from sending that information directly to a foreign government.

But attorney John Richardson calls the information-sharing deal a “mechanism for the United States to extract after-tax Canadian capital out of the country.”

“What the U.S. is really doing is claiming the right to levy taxes on people who don’t live in the United States on income that is in no way connected to the United States. It simply cannot be tolerated,” said Richardson.

Many Canadians don’t even realize that the U.S. considers them taxable citizens, nor do they want U.S. citizenship, he said. That’s because the U.S. considers those born to American parents outside the country American, or anyone born in the U.S. American, even if they live their whole life in another country, unaware they are accumulating a mountain of fees and taxes.

The IRS has changed its position slightly to wave the massive penalties for “accidental Americans” and those unaware they needed to file with the IRS. But they are still required to pay taxes.

Americans Line Up to Renounce US Citizenship in Toronto.

Virginia Hillis, Gwendolyn Deegan sue Ottawa over new FATCA tax rules

For those who follow implementation of the US FATCA, this Canadian court case will be of interest. My understanding from those who follow FATCA closely, the deal Canada struck with the US is more protective of Canadian rights than that signed with other countries (see The Franco-American Flophouse for regular updates):

The women are American-born dual citizens of Canada and the U.S who left the states in childhood and have lived in Canada for decades. They argue the recently enacted Foreign Account Tax Compliance Act violates their rights as Canadians under the Charter Of Rights And Freedoms.

Windsor, Ont., resident Virginia Hillis, 68, and Torontonian Gwendolyn Louise Deegan, 52, stepped up as the figureheads of a fight that has hundreds of thousands of Canadian residents fuming.

Both women were born in the U.S. but have never worked south of the border, and as such have never paid or filed U.S. taxes. Indeed, neither has ever had or used a U.S. passport.

“Gwen … has travelled to the United States in the past and has been questioned by a border officer as to why she, a person with a United States birthplace, does not have a United States passport to travel into and out of the United States, to which she always replies: Because I am a Canadian,” the pairs statement of claim reads.

Nonetheless, under the agreement that Ottawa agreed to comply with in February, Canadian banks are now obliged to hand over names and account numbers to the IRS of any clients that Uncle Sam suspects are U.S citizens.

Virginia Hillis, Gwendolyn Deegan sue Ottawa over new FATCA tax rules – Business – CBC News.

De l’exclusion des expatriés | Le Devoir

An opinion piece by Eric Laporte on voting rights for expatriates and a good short comparison table. I am comfortable with Canada’s five-year rule. While one can keep in contact with the politics and culture back home, the reality is that one does become more distant over time and, apart from the US, most expatriates pay taxes to the country they reside in, not their country of citizenship. No representation without taxation.

Un Américain, un Français, un Allemand, un Britannique est fier que l’un des leurs aille à l’étranger pour représenter son pays et aussi, ce qui est le plus important, aille à l’étranger pour aller chercher de la nouvelle expertise. C’est comme ça que les États-Unis se sont bâtis, en allant chercher l’expertise étrangère, non seulement avec l’immigration, mais aussi avec les contacts à l’international. On ne peut pas donner de signe plus clair à un citoyen qu’on ne le soutient pas qu’en lui enlevant ses droits démocratiques.

De l’exclusion des expatriés | Le Devoir.

Defending Citizenship-Based Taxation

For those interested, a review of Michael Kirsch’s Defence of Citizenship-Based Taxation, written more from a legal than practical perspective, it would appear.

The Franco-American Flophouse: Defending Citizenship-Based Taxation.

Canada’s dangerously distorted tax conversation | Toronto Star

The alternate and needed conversation on taxes to ensure a balanced discussion by Alex Himmelfarb, former Clerk of the Privy Council and Director of the Glendon School of International and Public Affairs.

As someone who has benefitted from healthcare over the past few years (more than I ever wanted), looking at both services provided and cost of taxes provides a balanced perspective and conversation.

While this does not necessary resolve issues related to levels of taxation, it does reinforce a more sound political discussion about what level of services, and what kind of services, we as citizens wish to pay for, as government services are not free.

His book, Tax Is Not a Four-Letter Word, is coming out later this month.

Canada’s dangerously distorted tax conversation | Toronto Star.

Working abroad won’t spare you from tax hit at home – Business – CBC News

How Canada determines residency for tax purposes.

Working abroad won’t spare you from tax hit at home – Business – CBC News.