Why expats renouncing US citizenship ‘doesn’t make financial sense’

Americans who move abroad still have the responsibility to file their taxes with the IRS, sometimes in addition to taxes paid at the place of residence. Not surprisingly, the thought of renouncing their American citizenship may have crossed their minds at least once.

However, experts advise against this move.

“It generally doesn’t make financial sense, and there are several reasons for that,” said Alex Ingrim, a financial advisor at Chase Buchanan Wealth Management, based in Italy.

Although there may be cases where “the pain of being an American” arises in terms of tax liability, “very rarely are you double taxed” as an American, Ingrim said.

Additionally, renouncing citizenship is not an easy process, and it can be difficult to turn back the clock if you change your mind, said certified financial planner Jude Boudreaux, associate and senior financial planner at the Planning Center of the New Orleans.

Therefore, taxpayers planning to move overseas in the coming year may need to plan ahead to determine what their tax residency will look like.

Before you go abroad, check what your financial situation will be: whether you will work or rely on your retirement savings.

“The United States and the country (of residence) could have an income tax treaty, an estate tax treaty (or) a standardization agreement, which addresses retirement income like Social Security,” Boudreaux said , from CNBC FA. Member of the board. “It all depends on the different rules.”

At this point, some European countries, such as Portugal, tax the income streams of retirees, so the expatriate tax under the double taxation agreement is imposed on the foreign country in which they reside and not on the States “United,” Ingrim said.

Under such an agreement, those who file their U.S. tax returns can use the credit from what was paid in the other country to extinguish their U.S. tax liability, he said. added. For example, if Portugal has higher tax rates, your US liability is wiped out.

Likewise, if you earn Portuguese income and pay Portuguese income taxes, you’ll get credits on your U.S. return for taxes paid abroad, according to Boudreaux.

“The pain of being an American comes when you go to file your taxes…and the fact that it costs more to file your taxes in two different countries,” he said.

Americans who end up revoking their U.S. citizenship might do so to explore different investment options or very low-tax jurisdictions, Ingrim said.

For example: an American moves to a place with little or no taxes, such as Monaco or Dubai. However, they still have to pay US tax.

“For these people, it’s painful, and (they) choose to renounce their citizenship to avoid paying taxes,” Ingrim said.

Others may want to explore investment options, such as European mutual funds, exchange-traded funds, savings products and wealth structuring solutions.

However, “if you buy a mutual fund, you may find yourself subject to a really negative set of tax rules,” Boudreaux said.

The IRS considers these products passive foreign investment companies, or PFICs, and the federal agency has rules regarding the types of structures U.S. taxpayers can invest in, Ingrim said.

“Reporting is extremely onerous and costs a lot of money,” he said. “For people who are just trying to build their savings, it can be very frustrating.”

This may particularly apply to Americans who earn money in euros and do not want to send money back to the United States to invest in dollars, or if they want the tax advantages that some mutual funds Europeans may offer in some jurisdictions.

However, despite the heavy security barriers, US citizens still have access to the US financial system, which is something to consider before giving up passporting.

The U.S. financial system “is really a huge advantage because it allows you to invest, trade and hold your money for next to nothing,” Ingrim said.

Most European banks usually charge high fees for the same services and are constantly trying to sell you new products.

“The American system is more evolved, and if Americans adopted this point of view when they live abroad (…) they would be a little happier to be Americans,” he added.

Overall, renouncing one’s U.S. citizenship is a much bigger process than it needs to be, Boudreaux said.

“It’s not necessarily easy, it can be a little expensive and it’s one of those things that’s hard to undo once you’ve done it,” he said.

Additionally, you may have to pay exit taxes as an expat under the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, Boudreaux added.

“You can’t just move abroad without paying taxes on things you owned in the United States and then go overseas,” he said. “There is basically no way to avoid not paying U.S. taxes one way or another.”

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