Start out with this fact firmly in mind: United States citizens or resident aliens must pay annual income tax (IRS Form 1040) on all income earned from any source anywhere in the world.  That’s the rule, no matter where you live, in or out of the United States.  Unlike many other nations, a U.S. person can’t escape taxes simply by moving offshore. But there are ways that an American can reduce or defer taxes legally. • Estate Taxes: Although it’s complex and requires expert tax and legal help to create, an offshore asset protection trust may be able to produce significant estate tax savings for your heirs.  And with the current uncertainty surrounding U.S. estate taxes, that may be a major savings.  • Life Insurance and Annuities: Although the IRS doesn’t like the fact, it’s still possible to achieve major deferral of current taxes using offshore life insurance and annuities as an investment vehicle. But this too is a technical area that demands expert help.  But let’s talk about expatriation, what some have called “the ultimate estate plan.”  The most daring tax avoidance plan of all, it requires an American to acquire a second citizenship, move to a no-tax nation, reorder your assets and, finally, formally relinquish your U.S. citizenship. Is It Legal? If a U.S. person intends to live offshore or engage in extensive offshore finance, it’s worth considering a basic rule: U.S. government policy 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 an individual’s deliberate act.  One officially must renounce native or acquired legal 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 such case the person already must have acquired a new citizenship, lest they become “a man without a country.” The U.S. Constitution guarantees U.S. citizens the right to acquire citizenship from other nations, the right to live and travel abroad freely, and the right to end U.S. citizenship.  These rights have been affirmed by U.S. Supreme Court rulings.  It’s worth noting that U.S. law clearly confirms the right of an American citizen to “dual citizenship.”  That is, U.S. persons have the right to acquire a second citizenship and passport.  That dual status can be very useful for those who engage in offshore business or make their home abroad.

The Sovereign Society, headquartered in Waterford, Ireland, was founded in 1998 to provide proven legal strategies for individuals to protect their wealth and privacy, lower their taxes and to help improve their personal freedom and liberty. The Society's highly qualified contacts recommend only carefully chosen banks and investment advisors as well as financial and legal professionals located in select tax and asset haven jurisdictions around the world. The Society provides advice concerning the establishement and operation of offshore bank accounts, asset protection trusts, international business corporations (IBCs), private foundations, second citizenships and foreign residency, as well as practical safeguards for financial, Internet and personal privacy. The Sovereign Society stands alone in fulfilling this singular, international offshore service role for its members. To learn more about our organization and how you too can become a member, please click here.

But this exodus provoked a political backlash.  As Forbes magazine observed: “For more than a decade Congress has obsessed over the fact that a handful of rich folks, including fund operator John Templeton, Kenneth Dart of Dart Container and Campbell soup heir John Dorrance III were able to escape U.S. income and estate taxes by renouncing their citizenship.”

U.S. politicians have found an easy scapegoat in the relatively few ex-Americans who have relinquished their citizenship.  The repeated attacks by politicians notwithstanding, the issue here is exorbitant taxation, confiscatory rates that drive away those wealthy Americans who pay most of the taxes, do the investing, and create needed jobs.

Nonsense Made Law
An example of these attacks on wealthy Americans came in the U.S. Congress in late 2005.   Fortunately, it failed. Sec. 5512 was tucked into the multi-billion dollar highway bill passed by the U.S. Congress.  It would have imposed an enormous capital gains tax on all the property owned by a U.S. person who relinquished U.S. citizenship with the intent to avoid U.S. taxes.  Fortunately, this punitive scheme died before the bill became law.  But with Democrats now in control of Congress, this confiscatory tax may be revived, especially since its author, U.S. Rep. Charles Wrangle (D-NY) will soon be the chairman of the tax-writing House Ways and Means Committee.

In 2004 the “American Jobs Creation Act” wrote the current law on U.S. tax expatriates, what amounts to a “means test” on the wealthy.  It measures net income and back taxes paid to determine if tax avoidance motivated the move offshore.  It presumes that anyone who ends citizenship who paid more than US$124,000 in net taxes for the previous five years or has a net worth of more than US$2 million, is a tax expatriate and left to avoid taxes.  Proof of intent is no longer required.

The law also says that former U.S. citizens who return to the U.S. for more than 30 days, will be treated as U.S. citizens for U.S. tax purposes and be taxed on their worldwide income (if they can catch them).  It even pretends to require U.S. tax expats to file annual returns for 10 years after leaving.

The U.S. Congressional Joint Committee on Taxation published a lengthy review that shows the IRS has not enforced special tax rules against people who give up U.S. citizenship or permanent residence status allegedly to avoid paying U.S. taxes.

It’s worth noting that among the few nations that have imposed punitive exit taxes were Nazi Germany that taxed departing Jews, and apartheid South Africa trying to keep disaffected whites at home.

The reason these laws haven’t been enforced is because they are unenforceable.  How can government judge whether a person left the U.S. with the intent of avoiding taxes?  How can an immigration clerk exclude a returning U.S. expat visiting the U.S. on the same basis?  Nonsense made law.

Of course it doesn’t take much prior planning, especially for wealthy people who wish to expatriate, to arrange one’s affairs so as to remove any assets and cash from the U.S. to a hospitable tax haven, such as Panama.  Instead of expat tax punishments, 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.  With tax and spend Democrats in control of the U.S. Congress, expatriation may become an even more attractive alternative.

Want to Live the Expat Lifestyle? 
Do you worry about the future of the United States?  Would you rather move your family and your assets far away from what used to be the “land of the free?”  If so, we have the answers you’re looking for.  The Sovereign Society just published a new report on the expat lifestyle, telling you how to expatriate, and what opportunities await for you once you switch to the expat life.  See the insert for more information.
 

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