Avoiding Taxes

Avoiding Taxes

Analyze the effects of renouncing your citizenship on your tax liability.

The act of renouncing your U.S. citizenship, or denaturalizing, has been the new trend as of late. There were 1,780 U.S. citizens who chose to renounce their U.S. citizenship in the year 2011 (Chishti & Hipsman, 2012). It is also a well-known fact that the United States is the only country in the world that taxes every one of its citizens, whether they live in the United States or abroad. Most speculate that this upward rising trend is due to the many tax savings that people are experiencing. One notable person of recent who has denounced his citizenship was Facebook co-founder Eduardo Saverin.

These changing trends have been sparked by many different changes such as legislative and Internal Revenue Service enforcement. When you live in a country such as the United States, where your capital gains and your worldwide income is taxed heavily, the incentive to why the change in trend is apparent. Some people, such as Eduardo Saverin, will be experiencing a tax savings of excess of $100million dollars now that they are no longer a U.S. citizen. For U.S. citizens who live abroad, not only are they paying the country they live in taxes on income earned in that country, they are also paying taxes again on income earned in their overseas country, by the U.S. government. When you denounce your U.S. citizenship you will only pay taxes on income earned in the country you live in overseas.

Analyze the effects of establishing dual citizenship on your tax liability.

Having dual citizenship is a burden on your tax liability, but also gives you the ability to work and love in two different countries. There are a couple of downfalls to holding dual citizenship in reference to your tax liability and responsibilities that you now hold to both countries. If you had a dual citizenship between the United States and Hong Kong, China, then you would essentially be paying double taxes. Hong Kong will tax you on any income earned in Hong Kong, and the U.S. will tax you on all capital gains and income earned both in the U.S. and in China. Granted, the tax laws vary from country to country, so your tax liability will be different depending upon which countries you have a dual citizenship for. All dual citizens of the United States must file a FBAR Report of Foreign Bank and Financial Accounts. When you file the dual status tax return for the United States, you are no longer eligible for the standard deduction however; you are allowed to itemize certain allowable deductions. You are also taxed a flat 30% rate tax for any income not earned in the United States.

Compare the effects of renouncing citizenship to establishing dual citizenship on your tax liability.

The effects of renouncing citizenship compared to the effects of establishing a dual citizenship are both very different. When you renounce your citizenship in the United States, you are taxed heavily for your efforts. The United States enacted the Ex-PATRIOT Act as a means of basically punishing those who have renounced their U.S. citizenship just to lower their tax liability. Some of the taxes that a person faces when trying to renounce their U.S. citizenship are as follows:

* You must file Form 8854 for the ten years after you have expatriated, even if you owe no tax to the U.S.

* In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date.

* You are exempt from the U.S. capital gains tax on U.S. investments, but are then subject to a 30% withholding tax on U.S.-source dividends and interest payments.

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