April 2007
As a national political issue, expatriation is hardly new. In the Foreign Investors Tax Act of 1966, Congress decided to make an issue of expatriation. In that Act, lawmakers tried to impose onerous taxes on exiting wealthy Americans who relinquished their U.S. citizenship "with the principal purpose of avoiding" U.S. taxes, a highly subjective intention that was virtually impossible to prove. The IRS couldn't prove such "intent" and very rarely even tried.

A 1996 anti-expatriation law inspired by the Forbes article asserts limited U.S. tax jurisdiction for a period of 10 years over persons who renounce their U.S. citizenship "with the principal purpose of avoiding U.S. taxes." Also covered by this law are permanent resident aliens ("green card" holders) or anyone else who has resided in the United States for any eight of the preceding 15 years.

For the purposes of this law, tax avoidance is presumed to be the true purpose if, at the time of expatriation, an expatriate's net worth exceeds US$2,000,000 or he or she paid an annual tax bill exceeding US$124,000 annually for the past five years, figures that are indexed for inflation. However, with proper planning, it is relatively easy to avoid U.S. taxes during this 10-year period.

The lengths to which politicians will go to penalize expatriates is demonstrated by a never enforced provision of U.S. law, also enacted in 1996 that permits the Attorney General to bar from returning to the United States anyone who renounces their U.S. citizenship to avoid U.S. taxes. In this manner, Congress barred individuals exercising their legal right to avoid taxes along with narcotics traffickers, terrorists and those suffering communicable diseases.

These Draconian laws set a dangerous precedent. They involve not only retaliatory government acts against resistance to high taxes, but poses possible human rights violations guaranteed by others laws and even the Human Rights Charter of the United Nations. It is worth noting that the U.S. Supreme Court repeatedly has affirmed the right of U.S. citizens to end their citizenship as well as the right to enjoy dual citizenship.

In reality, this political frenzy probably reflects collective envy more than any sense of patriotism by Americans or their congressional representatives.

Expatriation is not as serious a problem as some pretend: fewer than 800 Americans, rich or poor, have formally given up their citizenship in recent years. Most expatriates surrender their U.S. citizenship because they are returning to their native land or marrying a non-U.S. citizen.

How It Should Be Done 
Long before you formally give up your U.S. citizenship, you should reorder your financial affairs in such a way as to remove from possible government control and taxation most, if not all, of your assets.
Here are the steps you must take:

• Arrange your affairs so that most or all of your income is derived from non-U.S. sources. 
• Title your property ownership so that any assets that remain in the United States are exempt from U.S. estate and gift taxes. 
• Move abroad and make your new home in a no-tax foreign nation so you are no longer considered a "resident" for U.S. income tax purposes. 
• Obtain an alternative citizenship and passport. 
• End your U.S. citizenship and change your legal "domicile" to avoid U.S. estate taxes. 

One of the most important decisions is the choice of a second nationality. Millions of Americans already hold a second nationality; millions more qualify almost instantly for one by reason of birth, ancestry or marriage. For instance, in many countries (Ireland, Italy, Poland), having a parent or grandparent born in that country will qualify children or grandchildren for immediate citizenship and passport after presenting appropriate documentation.

Otherwise, you will need to qualify for alternative citizenship through prolonged residency (2-10 years) in a country in which you qualify for residency based on your economic status or investments you make there. 

For instance, both Panama and Belize have formal tax-advantaged residency plans for foreign nationals who wish to make their home there. After five years, sometimes less, you can apply for citizenship.

Alternatively, you may choose to purchase "economic citizenship" which can be obtained in a matter of months, but only at significant cost (US$225,000 or more). The only two legitimate economic citizenship programs still in existence are from two small Caribbean nations, the Commonwealth of Dominica and St. Kitts & Nevis.

Tax expatriation - it's complicated, but it could save you millions in taxes.

That's the way it looks from here.

Bob Bauman, Legal Counsel
To read more about more about this, click here to read the Sovereign Society's special report. Or read my blog today, for more information on expatriation.