What’s the proper way to tax personal saving and investment? It’s a great question, and under current tax law, we have lots of different answers! Specifically, we have four of them, which I’ll get to in a moment. But...
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1,001 Americans Renounced U.S. Citizenship in First Quarter of the Year
Not only are the corporations leaving, American citizens are, too. In both cases, it is taxes that are driving them away.
The Treasury Department announced this week that 1,001 Americans renounced their citizenship in the first quarter of this year. That’s more than the total renouncements in 2012 and about one third of the renouncements in 2013. So far 2014 is on track to be another record year.
According to international tax attorney Andrew Mitchel, there are three main causes:
1. Increased awareness of the obligation to file U.S. tax returns by U.S. citizens and U.S. tax residents living outside the U.S.;
2. The ever-increasing burden of complying with U.S. tax laws; and
3. The fear generated by the potentially bankrupting penalties for failure to file U.S. tax returns when an individual holds substantial non-U.S. assets.
As Andrew notes,
The U.S. is almost the only country in the world that requires its citizens that live permanently in another country to continue to file tax returns and pay taxes in the country of citizenship. Most people, especially those living abroad, are unaware of the unique way in which the U.S. taxes its citizens and long-term residents. Many believe that income earned from foreign sources is not subject to U.S. tax, and that while residing overseas there is no need to file U.S. tax returns. This is not an unreasonable belief, considering that most countries in the world operate in that way.
Regarding penalties for not filing:
Although each form carries its own penalty, the “standard” penalty for failing to file many of the forms is $10,000. That is, the $10,000 penalty applies per year and per form. If an individual should have been filing 3 of the disclosure forms for the past 6 years, the penalties could be $180,000 or more (10,000 X 3 X 6). Potential penalties of this magnitude are quite common, even for individuals of modest means.
Of course, the “elephant in the room” penalty is for intentionally failing to file the FBAR (Report of Foreign Bank and Financial Accounts --- now FinCEN Form 114). The monetary penalty for a willful failure to file this form is the greater of $100,000 or 50% of the account balance at the time of the violation. For example, say an individual has retired overseas and has accumulated a life savings of $1,000,000 that has been deposited in a foreign bank account. If that individual intentionally does not file the FBAR for 4 years, the penalty would be $2,000,000 (twice the amount of the cash in the bank).
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