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COMMENTARY | Have you ever thought about leaving America? I am not asking if you want to take a trip to some exotic land, but rather have events here gotten to the point where you want to toss your hands up into the air and say " I have had enough" and wish that you lived in some other country. According to Forbes magazine and the London based Legatum Institute, there are nine other "happier" countries than the United States. America scores even lower in a study conducted by the Organization for Economic Co-operation and Development. In their publication, How's Life, the United States scores somewhere between numbers 12 and 19.
A new client was referred to me a few weeks ago and it was my understanding that they wanted to discuss some financial strategies and develop a roadmap of their retirement. They discussed a desire to live in Panama, which is a popular destination for American retirees. However, they wished to take it one step further -- they not only wanted to live in Panama but they also wanted to renounce their United States citizenship, a process that I later learned is formally called "expatriation."
No one has ever approached me with this situation before and I had to do quite a bit of research on what the process entails. While the number of citizens wanting to renounce their citizenship is on the rise, it is still a miniscule number. According to the Financial Times , in 2009 there were only 743 American citizens or permanent residents who gave up their status, a three-fold increase from 2008. However, in 2010 there were 1485 people who renounced. As it so happens, when you renounce your citizenship, your name must appear in the Federal Register. The number seems to be increasing sharply.
You cannot renounce your citizenship while in the United States. The Immigration and Nationality Act requires "(5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State" It is also advisable that you have citizenship or permanent resident status with another country otherwise you might find yourself floating around an airport without access to any country.
You must also advise the IRS of your renunciation and file tax form 8854, which is intended to bring your full financial picture up to date so that the IRS can apply the appropriate taxes. The IRS will assume that you have sold all assets one day prior to expatriation and apply any capital gains tax. If you have a tax deferred retirement account such as an IRA or 401(k), the IRS will assume that you have taken a full distribution one day prior to expatriation.
You may be able to exclude certain amounts, but the IRS will collect their pound of flesh before they allow you to renounce your citizenship. As a result of the research that I did, I suggested to the client that they speak with an attorney and have a clearer understanding of the consequences of their actions.
The United States is one of the few, if not the only, country in the world which taxes its citizens on global income, so I can understand the rationale behind the final filing and form 8854. However, after reviewing all the actions required, their costs and consequences, I think that any time in the future that I get angry or annoyed with the way things are at home, I will hold my breath and think long and hard before saying "I wish I weren't American!"
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