In 2022, there were 3,816 Americans who renounced their citizenship. On average, renouncers are wealthy and high-income people. This number was 2,426 in 2021, and 6,705 in 2020.
From these three numbers’ comparison, you may guess it may be COVID-19 that cause wealthy people to give up their US citizenship to flee the pandemic in 2020. For details, the number in 2020 Q1 was 2,907, and 2,406 in 2020 Q2, when COVID-19 started to explode worldwide at that time.
While each person’s motivations for abandoning their US citizenship are different, there’re four main reasons: avoid possible high tax, escape double tax, avoid FATCA high compliance costs, and reduce the burden of filing US taxes. But as you can understand, most of them just want to protect their wealth.
1. Avoid Possible Increasing Tax
As high-income earners, they face significant tax burdens, including income tax, estate tax, and gift tax, which can greatly impact their overall wealth.
To low the tax burden, rich Americans frequently relocate to lower-tax states like Florida and Washington from high-tax states like California and New Jersey.
President Biden is proposing to make the wealthiest American households pay their fair share by instituting a 20% tax on all of their income, including capital gains. This would require billionaires to fork over substantially more than just 8% that they are currently taxed.
If approved, Biden’s proposed tax may lead to an escalating movement of ultra-wealthy individuals giving up their citizenship.
2. Escape Double Tax
To our surprise, a citizenship and taxes research published on IRS, found that the majority of Americans who renounced their citizenship already have lived abroad for many years.
According to the US tax system, as a US citizen, whether you live in or outside the United States, your worldwide income and assets are subject to the US tax rules. That means the US has citizen-based taxation, and you need to pay double taxes, both in the United States and abroad country you live.
Renouncing is a way to avoid paying taxes in the United States, and a growing number of people have done this way.
3. Avoid FATCA High Compliance Costs
FATCA or Foreign Account Tax Compliance Act (FATCA) of 2010 is another major financial burden and pushed certain American citizens to renounce their citizenship.
The number of renounced citizenship started to swell in 2010 (the number was 1,534 in 2010, while that was 743 in 2009), when FATCA was introduced, which increased reporting requirements, compliance costs, and penalties for Americans with overseas assets.
FATCA requires foreign financial institutions ( FFIs) to report the assets of US citizen account holders to the IRS. It is intended to go after wealthy Americans who have financial assets overseas in order to avoid paying taxes or known as offshore tax evasion.
To comply with FATCA, FFIs have to report US citizens’ accounts to the IRS. Providing these financial services increases the costs of FFIs. And this in turn increases compliance costs for these US citizens.
Under FATCA, IRS can easily know individuals’ income and assets overseas by FFIs’ reporting.
Thus, these individuals have to report their foreign-held assets above the reporting threshold to the IRS, although they think this kind of tax compliance and disclosure is inconvenient or unfair. But if not, they would be punished with serious penalties.
To avoid potential fines, many foreign banks refuse to provide financial services to American citizens, such as savings accounts, loan accounts, stocks account, retirement funds, and etc.
So if you’re an American regular person living abroad, your daily life may be affected. You may not be able to open bank accounts and be afraid of making financial decisions. As you can imagine this would be frustrated.
Particularly for accidental Americans, who are citizens of the United States because they were born there but never lived there or only resided there as a child.
4. Reduce The Burden Of Filing US Taxes
Some people give up their US citizenship just to reduce the burden of filing US taxes every year instead of trying to avoid tax liability.
As mentioned before, those who live outside the United States must still file US tax papers to reveal all their non-US bank accounts and assets. As you can imagine it is complicated and there’s a lot of work to be done. Therefore they have to hire an accountant who is familiar with the US tax system.
Some wealthy people still live in the US instead of leaving after renouncing their citizenship. The benefit is that they can have lower taxes for their income, investments, and properties while keeping these holdings.