The number of U.S. taxpayers renouncing their citizenship more than doubled to 1,534 in 2010 from 742 in 2009, according to the Internal Revenue Service.
More taxpayers renounced their U.S. citizenship in 2010 than in the previous three years combined, or in any year since at least 2003, according to data compiled by Andrew Mitchel, an international tax attorney in Essex, Connecticut.
The increase was prompted in part by the U.S. government’s growing efforts to find and tax the hidden assets of U.S. citizens around the world. Taxpayers who were thinking about giving up their citizenship now have more reasons to make the move to put them outside the IRS’s reach, said Peter Connors, a partner at Orrick, Herrington & Sutcliffe LLP in New York.
“There’s going to be more expatriation,” he said. “It’s a general issue of the power of the U.S. and people concluding they can get what they need by living outside the U.S.”
Every quarter, the IRS publishes in the Federal Register a list of U.S. citizens who expatriate. People who want to give up their citizenship must appear in person before a U.S. consular or diplomatic officer in another country and sign an oath of renunciation, according to the U.S. State Department.
Paying Income Taxes
For 2011, U.S. citizens with a net worth of more than $2 million or with average annual income taxes exceeding $147,000 for the past five years must pay income taxes on the value of their assets as if they were sold the day before the expatriation, according to the IRS. They can benefit from an exclusion of $636,000.
Mitchel said changes in the law in 2008 eliminated requirements that some expatriates file tax returns for 10 years after leaving the U.S. The law now allows noncitizens to spend more time in the U.S. without being taxed as residents.
In recent years, Congress and the IRS have increased their scrutiny of the offshore financial assets of U.S. citizens. The IRS recently announced the second round of a voluntary disclosure program that allows U.S. taxpayers with undisclosed assets in other countries to pay a penalty and likely avoid prosecution.
Taxpayers have until Aug. 31 to participate in the program, which requires those who come forward to pay up to 25 percent of the highest annual amount in the account from 2003 through 2010, plus back taxes, interest and other penalties for those years.
“The U.S. tax rules for U.S. citizens living overseas can be quite complex,” Mitchel wrote in an e-mail. “The increase in awareness of the penalties has caused many individuals with dual citizenship to conclude that their U.S. citizenship is not worth the stress and hassle of the U.S. tax-filing rules.”
Also, starting in 2013, overseas banks will face a 30 percent withholding tax on income from U.S. assets if they fail to share information about American account holders. The potential penalty may prompt U.S. citizens to disclose their assets.
Adding to the desire for some wealthy taxpayers to give up their U.S. citizenship was the uncertainty surrounding the fate of the estate tax for much of 2010, said Scott Michel, a tax lawyer at Caplin & Drysdale in Washington.
Congress in December passed, and Obama signed into law, legislation establishing an estate tax through 2012 with a top rate of 35 percent and an exemption of $5 million per person. If Congress hadn’t acted, the tax would have gone to a 55 percent top rate, with a $1 million exclusion, on Jan. 1.
“In a number of the expatriation cases I’ve seen, you have people who have accumulated a fairly significant fortune,” Michel said. “They have a lot of their lives overseas and saw how much their estate might pay and asked: ‘Why would we do that?’ They saw it as a steep price for a blue passport.”