Abdicating citizenship: A tax strategy to approach with caution

There are a lot of tax-saving strategies that individuals can employ. Some work well. Others need to be examined really carefully before being tried to make sure the individual doesn't wind up proverbially shooting themselves in the foot.

Particular to that latter category could well be the issue of whether an American citizen should renounce their U.S. citizenship and move out of the country to some haven where their money will be more protected. This is a question that definitely falls into the category of complex tax issues that need to be discussed with an attorney.

Readers of this Washington, D.C., tax law blog may be interested to learn that, according to the U.S. Treasury Department, the numbers of Americans giving up their citizenship has risen significantly since 2008. In that year, some 231 people renounced their allegiance to the U.S. In 2012, that number had jumped to more than 1,780. The data doesn't specifically say that the reason people have started to leave is because of taxes, but observers say it's a good guess that it has something to do with it for many.

One financial services provider to expatriates says he's seen inquiries regarding the tax implications of changing citizenship and moving funds overseas have gone up nearly 50 percent. A 2012 study of the world's billionaires by the Research Institute of Industrial Economics also found that more than two thirds of them have picked up stakes and moved to lower capital gains tax countries in the past 20 years.

Before one gets too enamored with the idea of becoming an ex-pat, here are some things to consider. While the process isn't hard (simply signing an oath of renunciation in front of a U.S. consular official in a foreign country), the effects are permanent. You can't change your mind later. Also, getting visas to travel to the U.S. could become difficult.

Most critically, however, is the fact that a person giving up citizenship doesn't avoid taxes. Individuals with a high net worth or long record of high annual income earnings have to pay exit taxes. There's a liability on capital gains over a certain amount, and on retirement accounts. There may be other liabilities depending on individual circumstances, so consulting with an attorney is a must.

Source: Yahoo News, "Should You Renounce Your Citizenship?," Caroline Kim, Feb. 13, 2013

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