Taxes Prompt More Americans to Renounce Citizenship | Hacker News Reader

Taxes Prompt More Americans to Renounce Citizenship

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42 pointsstfu46 comments

I experience this first-hand myself. I am a dual citizen of US and Australian citizenship, living in Melbourne, Australia.

Under the tax treaty between Australia and the US, I can declare tax paid to Australia (where I work) and I receive an exemption from paying that amount of tax to the US. With Australia's income tax almost universally higher, this means that I will probably never need to actually pay tax to the US.

However, I still have to file tax in both countries every year. This is made more difficult by the fact that the tax year in Australia runs from July to June, with the US running 6 months offset. This makes the paperwork time consuming and difficult to perform, and there are very few accountants in Australia versed in US tax practices, so I can't even go out and hire a professional who can manage both my Australian and US tax lodging.

Although I was born and raised in the US and in many ways still think of the US as my homeland, I am on the verge of giving up my US citizenship for exactly this reason.

Don't do it. Learn how to use turbo tax online. It costs $50, and takes about 2 hours. I don't know about your personal situation, but you are likely very far from owing any US taxes.

You don't need an accountant. Just do it to the best of your ability. It is pretty simple. Income, AUS taxes paid, foreign account list. TurboTax will tell say you owe nothing, then click the e-file button.

Don't trash a US passport over $50 and 2 hours. Once you do it once, it will take about 30 minutes the next year.

I am sorry to downvote you but this is bad advice that could cost some lurker quite a bit of penalties. The fact that aethr and so many other people bring up the drastic step of renunciation should have told you right off the bat that this is not a matter of "$50 and 2 hours" learning Turbotax.

The issue is not the tax owed (which as you correctly note tends to come out near zero) but the reporting requirements, which go well beyond those imposed on people who live in the US and keep all their assets there. Turbotax and other consumer software packages do not (and likely never will) support the kinds of complex forms you have to file if you settle outside the US and start leading a normal financial life like any other resident of your adopted homeland: Form 8621 if you'd like to buy ETFs on your local stock exchange, Form 3520 if you're obligated to participate in a local retirement plan --- and most relevantly to Hacker News, Form 5471/8858 (and maybe a 926 and 8832 as well) if you'd like to start your own company where you live. Estimated time for completion for Form 5471 for example is 44 hours (plus a recordkeeping burden of 130 hours, primarily due to the part where you have to redo all your company's accounts in US GAAP), and it has a failure-to-file fine of tens of thousands of dollars per accounting period.

http://www.irs.gov/pub/irs-pdf/i5471.pdf

All of these forms (except Form 8938 & FBAR) must be filed regardless of the tax owed or the value of the asset in question. These forms (and their associated failure-to-file penalties) were designed with extremely rich onshore people in mind --- because Congress didn't think anyone besides a multi-millionaire tax-evader would use a "Controlled Foreign Corporation", "Passive Foreign Investment Company", or "Foreign Non-Grantor Trust". But as it turns out, the way the rules are written, literally every American who lives abroad for more than a few years ends up in a similar boat as American homelanders with more than 100x their income/assets, and has to pay accordingly for tax advice --- not advice on how to reduce their taxes (since once taxes in the country of residence are taken into account, there is already no tax owed), but advice on how to properly report to the IRS.

I thought that most of these online solutions bail very early if you don't live in the US.

FWIW I used H&R Block At Home to file my US tax return after I relocated to Australia and it worked fine. Note that e.g. American teachers at international schools have to file US tax returns so there are accountants out there who understand the issues.

I know TurboTax works well.

We have a truly insane taxation system.

In a related story, InfoWars goes on their usual over-hyped tirade over the non-travel law being proposed. Even accounting for the usual hype, it is a serious problem to civil liberties. http://www.infowars.com/irs-travel-ban-revoking-citizenship-... (I tried submitting this story but it looks like the domain is on the auto-delete list)

I really can't believe the system has gotten as bad as it has.

I was the tax lawyer interviewed for this article. I have helped dozens of people terminate their citizenship or green cards. Ask me anything.

Being Canadian, this strikes close to home. It seems like the crackdown was directed mostly at the rich to target tax evasion, but it has had the ~1 million American citizens in Canada trembling. Many of these people have not lived in the States at any point in their life (often born into dual citizenship), and all of a sudden they're being threatened with penalties for not filing taxes in the U.S.

My last impression from the U.S. Ambassador was that there would be reasonable reprieve for dual U.S.-Canadian citizens. Has that happened?

No reprieve yet and it appears that the IRS still wants to take 25% of your RRSP if you didn't file the right price of paper with the IRS. I'm meeting with the IRS in Washington on May 7 to propose an easy remedial system. We shall see.

But yeah. The IRS went hunting for whales and caught minnows.

There's a proposed bill that says that if you owe more than 50K the government won't let you leave the country.

Won't this effectively trap people? Is there any legal recourse -- including renouncing citizenship -- for somebody stuck inside the country?

This is our Berlin Wall.

It is all loosey-goosey at the moment but this law could evolve to "The IRS _thinks_ you might owe money so you cannot leave the country."

It is bad news.

This sounds horrible......

Very cool that this article interviewed a hn member.

My understanding is that you still have to pay taxes for 10 years after terminating citizenship, is this true?

Nope. That was the old system. That went away in 2008. The new system is that you are treated as if all your tax chickens come home to roost at once. All your IRAs etc are treated as distributing. You are treated as selling everything you own. It is a giant mark-to-market event in your life.

This applies to "rich" people. This means $2 million net worth and up, or you paid an average of $151k of Fed tax over the previous five years. Under these limits? You are out with paperwork, no tax.

Hi Phil,

It's very common in Australia for a founder to hold shares in their startup through a discretionary trust. What happens if the startup converts to a Delaware corporation and the founder moves to San Francisco, becoming a US person for income tax purposes?

Now they indirectly own shares in a US corporation via a foreign trust and I understand the IRS would tax an eventual acquisition extremely unfavorably. Does this mean that Australians in a similar position (like me!) need to forgo the benefits of using a trust and just hold the shares directly?

Oh Christ.

You have bought a $10,000 tax return. That's all I can tell you.

The mind boggles in a few directions. Migrating assets and corporations across borders is scary. You are now the creator and beneficiary of a foreign trust. Oh. Your superannuation is a foreign trust.

See. THIS is an example of why the US tax system is broken. Not because of the tax rate. Because of the rules. The folly and arrogance of a rules-based system. A logic system built like sediment builds up on the bottom of a lake. If sediment buildup involved corruption in the form of lobbyists.

Thanks Phil!

I went to grad school about 5 mins walk from your office, but right now the plan is to avoid ever again becoming a US taxpayer.

Yay CalTech. If you're ever in Pasadena give me a call.

The reverse situation for Australians is actually quite easy, for the most part if you have no income from or assets in Australia you're not required to file.

For those that do terminate their citizenship, what is the most common country they choose to live in afterwards? In other words, where is the grass perceived to be greener?

Most of my clients end up in high tax countries. Europe. Canada. NZ or Australia.

Makes you question the knee-jerk bias, doesn't it?

At least with some of those countries, if you're gonna be forced to pay taxes anyway, you might as well get more for your money like healthcare...

What countries would you recommend your clients to go to?

How do people tend to find the move after 2-3 years?

I have people come in who want to rant about America going to hell. They want out. I tell them they should go live somewhere for a few years to be sure they want to cancel the passport. Your point is dead on.

I haven't heard any complaints from the people I have worked with, though.

Is a shame this wasn't explored more in the article. The headline would make you think that this is about people leaving to pay less tax.

Perhaps a more accurate title would have been;

"Bureaucratic Paperwork Prompts More Americans to Renounce Citizenship

It's more like if you live overseas, it's expensive to pay double taxes. So some people are renouncing citizenship partly to pay less tax, not just to avoid paperwork.

Some people are leaving partly to pay more tax. Sometimes the spiral downwards of paying less tax can be bad for society. eg raises poverty line.

But you don't pay double tax on overseas earnings unless the overseas country requires you to pay less tax than in the US as long as you file the tax return, or at least that was what was written in the article as far as I could tell, so the only people paying more are doing so by not filing and being fined.

Did you see any trends with people terminating citizenship in regards to demographics? Income level? Race? Political stance?

I go regularly to Asia and the Middle East. There the younger generation is dropping the passport. It used to be that the parents would fly to the USA to have a kid born. Now those kids see the passport as a net liability, not an asset.
Otherwise I don't see a pattern. Family ties to another country, sure. Been living abroad for 20 years, sure.

Quite apart from Americans denouncing their citizenship, this absurd tax policy is surely a strong disincentive for many ambitious and successful global entrepreneurs from considering taking out US citizenship or applying for a green card, since many of the same penalties apply.
In my case as a Canadian, I worked as a software engineer for 4+ years on work visas in California before relocating to Australia in late 2010. My wife is an Aussie so I have permanent residency in Australia.
Although I turned off my US job site profiles, I still get emailed regularly by US recruiters asking if I'd be willing to move back to the US. My answer is always no. The opportunity cost of living under the restrictions of work visas in the US and playing the green card queue lottery in a potentially lousy job before your time runs out is just too high.

Another annoyance: with the latest batch of reporting regulations for accounts of US citizens, many foreign banks won't let US citizens open up investment accounts since it's not worth it to them to deal with the reporting. (Presumably they make exceptions for large accounts, but e.g. in Germany, where I live, most online brokerages don't allow such.)

This is increasingly common.
You know the saying "The Internet interprets censorship as damage and routes around it"? Substitute the US tax system for internet.
Our politicians and bureaucrats do not understand that it is a very big world. We risk declaring ourselves irrelevant. A large chunk of the world may simply shrug and say "meh who needs you." Exhibit A: China loosened its currency today. You KNOW they are going to pimp it as a reserve currency preferable to the USD.

Isn't it funny, when the Chinese don't loosen their currency, it's called mercantilism; when they do, they "pimp [the CNY] as a reserve currency". A case of damned if they do, damned if they don't?

Yeah it is a no-win. Not only for the Chinese government but for all of us--critics will be with us. The Chinese government is taking an action to create its own future. Let's see what happens.
I was a boy living in Africa at the tail end of the Empire. I still remember watching the pound sterling slowly drift into irrelevance.

The reporting requirements are seriously going to be what gets me to renounce. The limit they set -- $10,000 -- is absurdly low, and, honestly, since all of my income and all of my savings are made and held outside of the US, I don't see how it's any of the IRS's goddamned business in the first place.

The $10,000 limit was introduced in the 1970s when it was a lot of money. :-)

I estimate I spend two full work weeks a year on doing my nontrivial US taxes (and that's on top of paying a professional to actually do that -- that's just the "homework" he leaves me with, which he cannot do himself because he doesn't know the country's internal tax codes and language)[1]. This is an additional 4% tax on my time that is counted nowhere. And the tax professional's fees are not actually deductible because I'm in AMT regime. My effective tax rates turns out to be 10% or so above my official bracket all things considered -- in the sense that I cannot avoid paying those 10% (even if they do not go to the government's coffers -- they come out of mine)
I have income coming in from another country, which makes things complicated. I have to file there as well; I think it amounts to about 5 hours collected over a year to file (and that includes reporting my US based income to that country).
The federal US tax code is 73,000 pages. If you're an average person (you don't have fisheries or hundreds of the other special cases and exemptions), then only 5,000 pages or so are relevant to you (not the same 5,000 to every person - of course). And those 5,000 pages change ever so slightly every year.
If you've been doing your taxes by yourself, it is almost guaranteed that you are either overpaying or did something wrong (or both). Even if you are using a professional, the chances are extremely likely you are overpaying and/or wrong.
And if you are living in the US, you have state tax codes on top of that. Living in NJ and working in NY? You have two tax codes to work with and reconcile.
This is a complementary insane and broken part of the system to what's discussed in other responses to this posts.
In most european countries, if you are a salaried worker, you don't ever file anything with the IRS equivalent unless you have a nontrivial, uncommon situation (e.g., working for two employers at the same time _and_ you do not want them to know about each other; or income from abroad).
[1] No, I haven't been able to find someone who is qualified enough in both jurisdictions. My situation is complicated, though far from unique -- and no, as the "other way around" shows, a reasonable tax code can make filing trivial even if the situation is not.

This is one dumb article.
Firstly it's only 1800 people. And secondly of course more people are going to renounce citizenship when the economy is bad versus 2008/9/10 when it was notably better.

Did you read the article? It relates the increase of people renouncing citizenship with the increased enforcement of IRS and legislation targeting foreign income.
This has been a topic of discussion in Canada for some time now where there are many dual citizens. I think that it is insane that even if you have not earned any income in the USA for many years you still need to file a return or face insane penalties.

What world were you living in where the economy was notably better in 2008/9/10 than it was in 2011?
I'll agree that 1800 is a number so small (three orders of magnitude smaller than the number establishing citizenship/permanent residency) that it's hardly worth a glance.

The 'low points' of the economy were in 08-09. The bottom of the market was hit around Feb 09. I use quotes because I personally believe it is still really bad.
On another note, does anyone on here have multiple passports? I do and consider it my last resort in case the US becomes a full blown police state.

the econ turns instantly horrible when you live in, say, South Korea and find out that you may owe a fortune to the IRS, just because your dad was /is a US citizen.

If I remember right, there are actually rules about that specific type of situation. If you've never lived in, had any substantial economic links to, or done anything that could be seen as claiming US citizenship, I believe you can renounce your citizenship and received a formal waiver of any tax liability.

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