What do Tina Turner and Facebook co-founder Eduardo Saverin have in common? More than you might think. Both celebrities recently gave up their U.S. citizenship, highlighting a growing trend among high-earning expatriates living abroad. Last year, a record 3,000 Americans renounced their citizenship, tripling 2012’s total.
Here’s a look at why some people are making that decision as well as the cost of doing so.
Why give up your American citizenship?
Unlike most countries, the United States government taxes the income of its citizens regardless of where they live. This is known as citizenship-based taxation. It’s worth noting, though, that this only affects expatriates earning more than $97,600. If you earn less than that while living overseas, you’re exempt from taxes, meaning handing in your U.S. passport wouldn’t make a huge financial difference. In fact, the fees associated with doing so might make you think twice about giving up your American citizenship.
There are also consequences to renouncing citizenship. It means giving up the benefits accorded to U.S. citizens, such as the right to vote in U.S. elections, easy access to the U.S. job market, unhindered travel in and out of the country, and government protection when abroad (for instance, if you run into trouble in a war-torn nation).
As of Sept. 12, the price of renouncing one’s citizenship skyrocketed from $450 to $2,350. In a memo published on its website, the State Department justified this drastic increase by explaining that the process requires “U.S. consular officers overseas to spend substantial amounts of time to accept, process, and adjudicate cases.” As well as handling stacks of paperwork, consular officers have to schedule multiple interviews with a person who opts to renounce his or her citizenship. The State Department adds that the previous fee was subsidized and that the updated price tag is “reflective of the true cost” of the service.
Along with the aforementioned processing fee, some people renouncing their citizenship will also be hit with an expatriation tax, or “exit tax.” This tax applies to anyone with either an average annual net income tax for the past five years exceeding $157,000 or a net worth of more than $2 million. Since this tax applies to high-earning individuals, it’s often viewed as the government’s final way of asking expatriates whether they’re positive they want to go through with the process. For those who can afford this one-time tax—like Ms. Turner and Mr. Saverin—the answer is a resounding “yes,” as it spares them years of having to pay significant U.S. taxes while enjoying life abroad.
If you reside in America’s upper tax bracket and live overseas, it may make financial sense to renounce your U.S. citizenship. Otherwise, you’ll want to think twice before setting off on what is by all accounts an arduous process. After all, despite the hype surrounding the growing number of expatriates surrendering their citizenship, there are still roughly 6 million Americans living abroad who are choosing to hold on to their American passports.
As with any important decision that affects your bank account, it’s crucial to do your homework before setting the wheels in motion.
Passport image via Shutterstock.