It’s finally seeping into the mainstream consciousness that the U.S. tax system works very aggressively against citizens abroad, even those who are citizens in name only. Boris Johnson, the mayor of London, is renouncing his U.S. citizenship after he had to pay a hefty IRS tab on capital gains on the sale of his London home. Johnson was born in the U.S. and spent some of his toddler-hood here before moving back home, permanently, with his parents to the UK.
In the future, shedding U.S. citizenship may be a lot cheaper for those with similarly thin connections to the United States.
Existing tax law treats renunciation as if it were a liquidation event. If you have more than $2 million in assets, you have to pay capital gains on all of your assets as if they were sold as of the date of expatriation — an exit tax, in effect. Prospective renunciants must also show that they have been tax compliant for the past five years on regular income taxes, which all U.S. citizens must file regardless of residence. External Americans who haven’t been filing have to pay hefty back taxes and penalties on the way out the door (including some under the hated FBAR and FATCA regimes relating to foreign accounts that fall heavily on external citizens). Even so, every quarter now we are hearing that record numbers of individuals are renouncing their U.S. citizenship.
The Obama Administration’s 2016 Green Book includes a proposal under which an individual would not be subject to the exit tax requirements if the individual:
1. became at birth a citizen of the United States and a citizen of another country,
2. at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
3. has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
5. relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
6. certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.
This would exempt those whose citizenship really is nominal (or even unknown to them). It may be the smart U.S. citizen parent outside the U.S. who doesn’t register a child’s birth with a U.S. consulate, a trend that is now being reported.
It would still leave covered a lot of folks whose connections are very tenuous (maybe Boris used a U.S. passport here and there). It’s only a proposal, requesting and requiring congressional action. This very informative post from the Canadian law firm Moodys Gartner explains how the Obama Administration might be able to accomplish the same end through a regulatory backdoor allowing it to backdate the expatriation of birthright dual citizens.
In any case, the proposal does evidence some understanding that the imposition of U.S. taxes on accidental Americans is unsustainable. The Moodys Gartner post plausibly suggests that foreign governments (including Canada) may be pushing for the reform as their constituents get caught in FATCA’s net. This is a continuing story.