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THAT’S THE WAY IT LOOKS FROM HERE. Q: “How can I avoid paying U.S. income taxes?” A: You can’t, as long as you are a U.S. person. In my travels, I often get this question from folks the U.S. Internal Revenue Service calls “U.S. persons.” That’s IRS shorthand for those multi-millions (citizens and resident aliens) that must pay American income taxes. Since the U.S., alone among major countries, imposes taxes on its citizens, no matter where a U.S. citizen lives, where their assets are located, or where their income source is based, American income taxes apply. A U.S. person can be born in, but spend their entire life outside the U.S., and the law says they still owe U.S. taxes. That’s because U.S. citizenship is so easy to acquire. Virtually everyone born in the U.S., or a U.S. dependency, automatically acquires it. In addition, certain individuals born outside of the U.S. are U.S. citizens because one or both parents are U.S. persons or otherwise have close connections with the U.S. In contrast, most other countries impose taxes only on the income of actual residents. A U.K. citizen who permanently relocates to low-tax Switzerland is no longer subject to U.K. income tax and (after five years) U.K. capital gains tax. Similar rules apply in the remainder of the EU and in Canada, although Canada imposes an onerous exit tax on expatriates. Thus, moving to a tax haven is a legal way to avoid income taxes for nearly everyone, except those hapless “U.S. persons.” Fortunately, there are several options that a wealthy U.S. person can take to legally avoid the long arm of the taxman: * Life Insurance & Annuities: It’s still possible to achieve major deferral of current taxes using offshore life insurance and annuities as an investment vehicle. But this is a technical area that demands expert help.     * Foreign Earned Income Exclusion: If you earn a salary while living offshore, you may be permitted to exclude up to US$80,000 (US$160,000 for married couples) from your taxable income.     * Asset Protection Trust: Although it’s complex and requires expert tax and legal help to create, an offshore APT can produce significant estate tax savings for your heirs. However, there are generally no income tax savings. The Billionaire’s Tax Loophole—or the Ultimate Estate Plan? The only way a U.S. person can escape U.S. taxes for good is to end U.S. citizenship after relocating to a foreign country in a dramatic action called “expatriation.” It’s legal and the U.S. Supreme Court has upheld the right to expatriate repeatedly.

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Every expatriating American can reap immediate benefits in terms of lower income taxes (assuming they relocate to a low-tax jurisdiction), but the real payoff comes later, when your wealth is distributed to the beneficiaries of your estate. Since the estates of wealthy Americans are subject to taxes as high as 46%, the tax savings can be dramatic. In 1962, John Templeton, respected international investor, businessman and philanthropist, surrendered his U.S. citizenship to become a citizen of the Bahamas. This move saved him more than US$100 million when he sold the well-known international investment fund that still bears his name. Extremely wealthy individuals such as Dart and Dorrance have saved billions of dollars in estate taxes with this strategy.
Expatriation, Step-by-Step

Expatriation is “the ultimate estate plan.” It’s a legal, step-by-step process that can lead to the legal right for you to stop paying U.S., or other national income taxes forever.

For U.S. persons, expatriation works best for those who have substantial assets that can easily be moved to a low tax country. This process requires professional assistance to coordinate the movement of assets offshore and help choose and acquire a second nationality. When all that’s done (and done right), you must relocate to your selected new home in a low-tax or no-tax country. There you will take the final step to tax freedom: the formal ending of U.S. citizenship.

A drastic plan? You bet. But for the U.S. person who wants a permanent and legal way to stop paying U.S. taxes, expatriation is the only option.

One caveat: U.S. tax law seeks to impose taxes on former U.S. persons who expatriate for a period of ten years after they end citizenship. This current tax scheme, in theory, tries to collect taxes on all income or gains after expatriation. But if you have no income from U.S. sources and no assets there, there’s nothing for the IRS to collect.

Can a former U.S. citizen return to America? Yes, but you may need to obtain a visa, and the Immigration and Nationality Act says that if your expatriation was “tax-motivated,” you may be excluded. This law has never been enforced, and many legal experts say that it’s unconstitutional. But it demonstrates the vehemence of the ongoing Congressional pursuit of tax refugees. The law also says that expats who return to the U.S. for more than 30 days will be treated as U.S. citizens for tax purposes and be taxed on their worldwide income (if they can find them).

How To Surrender Your U.S. Citizenship
The basic rule: U.S. government policy, as defined by the courts, presumes that an American citizen does not wish to surrender citizenship. Clear proof of that intention is required before expatriation will be recognized officially.

Expatriation comes about because of a deliberate act. You must officially give up citizenship. This means visiting a U.S. embassy or consulate abroad, answering a standard questionnaire, then signing a formal document requesting an end to U.S. citizenship. Subsequent U.S. State Dept. approval usually is granted as a routine matter. In every case, the applicant must already have acquired a new citizenship, lest they become “a person without a country.”

Some U.S. congressmen want to impose a radical “exit tax” similar to that in effect in Canada on “taxpatriates.” It would impose on tax-motivated expatriates a one-time capital gains tax on the unrealized gains from any investment they hold, anywhere in the world. Many expatriates would have to liquidate much of their assets simply to pay the tax. But there is already a net worth test that presumes anyone with a net worth exceeding US$2 million who expatriates does so with the intent to avoid taxes. Forbes magazine noted, “while this …will cause pain for some moderately well off expatriates, the truly rich, and tax averse, will still be able to plan around it.” (It’s worth noting that among the few nations that have imposed punitive exits taxes were Nazi Germany to tax departing Jews, and apartheid South Africa trying to keep disaffected whites at home.)

Of course, instead of expatriate tax punishments and exit taxes, the U.S. Congress should adopt real tax reform and stop playing for headlines at the expenses of those who pay most of the taxes—because they’ll leave and pay no more.

Robert Bauman is Legal Counsel for The Sovereign Society and editor of The Sovereign Society Offshore A-Letter. A former member of the U.S. House of Representatives from Maryland, he is a graduate of the Georgetown University Law Center (1964) and the School of Foreign Service (1959)....
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