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Author: saunafool Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121597  
Subject: Re: Renouncing citizenship for tax purposes Date: 8/23/2013 4:23 AM
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I'm fine with people renouncing US citizenship to avoid US taxes. However, I want them banned from ever setting foot on US soil again. Seems a fair trade-off.

Maybe it would help to understand why Americans live overseas and what kind of situation the tax laws put them into.

I am American and I live in Europe, and I've been living in Europe for 6 years. I basically consider myself to be living abroad indefinitely.

Why do I live here? Because my wife is French and I saw an opportunity to build a business selling American-made product to oil refineries (which is what I did in the U.S. before moving). Basically, I was working for a small company selling a niche product in the U.S. and having a great deal of success. The manufacturer of the product (a Fortune 500 company) was completely unable to sell it in Europe--i.e. sales of $0. They asked if we would be interested, so I agreed to start a new company to sell the product over here. Now, we are very successful in Europe, which has created manufacturing jobs in the U.S. and a couple of sales jobs in Europe.

Most of the Americans I've met who live "permanently" in Europe are here for similar reasons--marriage or they started a business over here. Sure, there are some ultra-rich people who hide out in Switzerland. I've never met them.

Now, for the tax burden. First, you should be aware that we need to pay taxes in the country where we work. These taxes are generally higher than U.S. taxes to begin with. For Americans who are retired abroad and live off of investment income, they need to pay local taxes as well as U.S. taxes on all capital gains. The socialists in France just raised the capital gains tax rate on foreign income to 60% or something like that. (So much for my retirement in Provence.)

Americans living permanently overseas also need to pay U.S. income tax on income above $100,000/year ($190,000 filing jointly). You might think this is a generous exemption. However, the U.S. is the only nation on earth which imposes this burden upon its own expatriates. Iran does not do this. China does not do this. Russia does not do this. Even the French don't do it (although the new socialist government would like to).

What do we get for these taxes? Does our contribution count towards our Social Security when we get old? Can we take exemptions for 401k plans or IRA's? No. No. No.

Furthermore, until the last 2 years, the requirements were unclear. You had to know the requirement. No one sends you a letter with the forms to fill out. Nowhere was it written on the standard tax return documents. I tried to get a professional tax preparation firm to file my taxes. They wanted $2500! I have a relatively simple tax situation, so I told them to shove it. Fortunately, last year TurboTax built in the forms for reporting foreign bank accounts.

The U.S. laws actually make it worse. Americans cannot have investment accounts overseas. Or, they can, but the only two things which are accepted investments are cash and U.S. Treasuries. So, my investments still reside in U.S. dollars in my U.S. account; however, when I need the money, I will be at the mercy of an exchange rate which has fluctuated from 0.85 to 1.6 $/Euro over the past 12 years. Hopefully if I ever need the money, the exchange will be in my favor.

There are also several banks which refuse to open accounts for Americans because of the burden the American government puts on them. During the financial crisis, this was a real pain because we had two different accounts (one for the business, one for personal) and both banks were at risk of going under. There were some smaller local banks which were secure and did not have exposure to the housing bubble debt. We tried to move some money into one of the banks--just because we wanted some cash somewhere we'd be able to access in the worst case scenario. They refused to open accounts for Americans.

So, under what scenario would I renounce my citizenship? Fast forward 15-20 years. I'm currently in my mid-40's. If I stay here for another decade, every year I work here gets reported on my Social Security statement as $0. As stated, I can also not participate in 401k or IRA savings plans (except by using after-tax money in an IRA). Meanwhile, I will be qualifying for some kind of European pension, albeit very small because I will not have 40 years of work over here. I will, however, have full health care coverage for life under the socialized medicine in Europe. I've never looked into whether or not I will qualify for Medicare in the U.S. when I turn 65.

But, if things go well, somewhere in the far future, I should be able to sell my company or start extracting a very large salary to boost my private savings. If American law makes it impossible for me to extract the money without paying punitive taxes (i.e. 70% when you add the European income tax plus the U.S. tax) and they make it impossible for me to invest locally--because all of my retirement expenses will be in Euros, I would have to consider renouncing citizenship. This would simply be because it would be the only way for me to benefit from all of the work and risk I have taken over decades and be able to retire.

It is not a decision I think anyone takes lightly. Even according to the article in the OP, there were about 1800 citizens who renounced in 2012 our of an estimated 7.2 million Americans living abroad.

However, anyone who thinks the laws they have put in place over the past decade do not make it a challenge living abroad are simply unaware of the laws which have been put in place.
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