The tax burden on Americans living abroad is so great that many are renouncing their U.S. citizenship to avoid paying the IRS.

The United States is one of just four countries that taxes its citizens even if they are living and working abroad, and it is the only country that insists its citizens pay taxes on global income, capital gains and estates.

North Korea, Egypt and the Philippines also tax citizens living overseas, the Dow Jones Newswire reported Aug. 9, but in many respects, the Internal Revenue Service is required to do much more than the tax collection agencies in those other nations.

For example, many of the 4 million Americans living overseas are spared having to pay U.S. income taxes because they make less than the $76,000 annual exemption. However, “the implications can be particularly severe for high-income earners, active investors and those inheriting an estate,” the news service said.

In other words, some critics say, as usual, Uncle Sam is punishing the richest Americans – even those who don’t live here.

But besides hitting Americans, under the worldwide income tax laws – first established in the 1960s and aimed at American “high-rollers” living in places like Monte Carlo – green-card holders and others granted permanent residency in the U.S. also must pay.

Dow Jones said the policy of taxing overseas Americans may eventually weaken U.S. ability to compete globally because it “could deter U.S. companies from sending employees abroad to work. …”

Some people living overseas have gone to great pains to avoid the long arm of the IRS. In one case, the news service reported, a U.S. resident of Dutch citizenship “took great pains to return his green card to the U.S. government,” to avoid paying much of his annual $1 million income to the Treasury Department.

The Dutchman renounced his U.S. residency in order to avoid having to pay the IRS, Dow Jones said, which was actually illegal because U.S. law prohibits people from renouncing citizenship or residency strictly for the purpose of evading taxes.

“In fact,” the financial newswire reported, “the U.S. is so serious about taxing non-resident, high-income earners that it passed a law two years ago saying any individual worth more than $500,000 and trying to renounce U.S. citizenship will be deemed to be doing so for tax evasion purposes and will be taxed anyway.”

Dow Jones said one Geneva, Switzerland-based tax lawyer estimated that about 400 Americans living in that country gave up their U.S. citizenship last year, and he expects the numbers to rise this year.

“People who are wealthy have tremendous problems, and many people think seriously about giving up their citizenship,” the lawyer – who was not named – told Dow Jones.

How much tax?

U.S. citizens living abroad are required to pay taxes on any income over $76,000 a year. However, if the remaining amount is taxed at a higher rate in the country where the citizen is living, then the U.S. tax is waived.

But, Dow Jones reported, there is also a “complicated ‘alternative minimum tax,'” which is not understood by many other than tax lawyers and accountants. It kicks in as earned income rises and against which only 90 percent of a foreign income tax can be credited.

That means an American earning a quarter of a million dollars annually in Switzerland would pay nearly $4,000 in alternative minimum tax to the IRS on top of Swiss taxes. While that may not appear to be much of a burden, the financial news service said, the same non-resident American is probably also investing in equities or other income-generating securities that would be liable for capital gains taxes.

Estate taxes – or, as some in the U.S. call them, “death taxes” – are even worse. While a nation like Switzerland taxes a whole estate at around 6 percent, the U.S. levies between 37-55 percent taxes on any amount above $675,000.

The high U.S. levies have forced some foreign tax experts to advise American clients to serious consider abandoning their citizenship.

One international lawyer who asked not to be named told Dow Jones Newswire: “If you have an estate worth $2 million-$3 million and you are not planning to return to the U.S., and you don’t travel there frequently, then it may not be a bad idea.”

Also, the news service said, a U.S. citizen living in Switzerland is liable for a 20 percent tax upon realization of any capital gains to the U.S. government – which is in addition to an annual tax of about 1 percent on total wealth to the Swiss government.

Worse, a new regulation this year makes it tougher for overseas Americans to hide investments from the IRS. As of Jan. 1, Dow Jones said, foreign banks “must report all earnings of U.S. citizens or green-card holders from any direct U.S. security holdings.”

At the present, U.S. citizens can get around that requirement by buying European-domiciled mutual funds that invest in U.S. securities. But tax experts say the IRS is set to close this loophole soon.


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