In a report just released by the U.S. Treasury, 3,415 Americans renounced their citizenship last year. This number is up from 2,999 in 2013, which was itself a record.
One major motivation regularly cited for the increase is the cost and aggravation of complying with U.S. tax and banking rules while living abroad.
Unlike citizens of any other advanced nation, Americans are subject to U.S. tax on their worldwide incomes, no matter where they live.
It is believed that the vast majority of people expatriating are residents of relatively high-tax countries, such as Canada, Japan, Australia and those in Western Europe. Canada has the greatest number of Americans living abroad of any nation on earth, so a disproportionate number likely were residents of Canada.
Americans in Canada, like those in the other countries described, already pay substantial Canadian taxes, so they rarely owe meaningful U.S. tax (the U.S. Internal Revenue Code has a number of mechanisms designed to avoid double taxation).
However, Americans still have to file returns, reporting all their activities in U.S. dollars. They have to provide detailed information about their bank and other financial accounts, both within the return and in a separate report. If they engage in what most Canadians would consider ordinary tax planning strategies, they have yet more reporting and possibly additional U.S. tax. Consider someone who has an RRSP, an RESP, a TFSA and a bank account for each of his minor children. Perhaps the RESP is invested in mutual funds. And he has a house, with a mortgage. All of these things create reporting and tax-paying complexities under the U.S. system. And we haven't even gotten started on people with closely-held corporations, partnerships or trusts.
In Canada, virtually all financial institutions are complying with the U.S. Foreign Account Tax Compliance Act (FATCA). Canada signed an Intergovernmental Agreement with the United States to facilitate implementation of FATCA. So Americans in Canada can't hide much longer.
In Europe, many banks are unwilling to comply, so they are simply refusing to deal with Americans. This becomes a problem for their spouses, too, even if they are not Americans, because they sometimes have joint accounts.
All in all, it's not the tax itself – it's the complexity of complying that's driving people to renounce. Expect this trend to continue.
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