More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Health Insurance: Health and Medical Savings Accounts A Health Savings Account is a trust created exclusively for the purpose of paying qualified medical expenses of an account beneficiary. Although they are popular, they are not without their pitfalls and the regulations can be complicated. Learn more about how to avoid federal taxation on the accumulation and distributions of HSA.
While the number of U.S. citizens abandoning their citizenship is increasing, so too is the number of foreigners coming to U.S. shores to take advantage of so-called “investor visas” that allow them not just to put some of their cash to work in this country but also to bring their families here to live, work, and go to school—and pave the path to citizenship.
Jim Duggan, a tax, wealth and estate planning attorney at Duggan Bertsch LLC, said that Americans are looking for a way to avoid paying taxes to the U.S. while living elsewhere. “The United States is one of the only nations that will tax its citizens regardless of where they reside,” Duggan said in a statement. “For Americans residing overseas in particular, they’re weighing the costs of having a U.S. passport.”
The numbers are on the rise, and the trend drew the public’s notice after Facebook co-founder Eduardo Saverin, a Brazilian native, chucked the U.S. in favor of Singapore in what was seen, though Saverin denied it, as a means of avoiding taxes on proceeds from the Facebook IPO.
In response to Saverin’s perceived tax dodge, as reported by AdvisorOne, Senators Chuck Schumer, D-N.Y. and Bob Casey, D-Pa., introduced the Ex-PATRIOT Act (or Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy Act), which would reimpose taxes on expatriates like Saverin even after they flee the United States and take up residence in a foreign country. Their plan would also bar those people from re-entering the country.
Ironically, Saverin may end up paying more in taxes because of the stock's performance since the IPO. The taxes on his shares were determined as of September 2011, when Saverin made his declaration to leave the U.S., at the internal third-party valuation used for restricted stock issued to employees. At the time the shares were valued at $30.58 each. However, according to PrivCo founder and CEO Sam Hamadeh in a Web post, the share price had sunk as low as $27.72 on June 4, which would have resulted in a considerably lower tax bill had Saverin waited.
The percentage of American expats who renounced their citizenship increased from 0.008% to 0.059% between 2008 and 2011. An Investors Business Daily article pointed out that much of the increase in departures likely can be laid at the door of aggressive enforcement of existing laws that began in 2008 when the U.S. government began to push Swiss banks to stop helping Americans evade taxes.
David McKeegan, president of Greenback Expat Tax Services, agreed, saying in a statement, “Anecdotally, it would appear that the rate of people renouncing U.S. citizenship is tied to increased government efforts to enforce U.S. tax regulations on U.S. citizens living abroad. That is to say, increased awareness of the need to file U.S. taxes and Foreign Bank Account Reports seems to have an impact on people’s decision to renounce citizenship, as the major increases have come after the 2009 voluntary disclosure program.”
“Despite a gift-tax exemption of $5 million and a lowered 35% tax rate, citizens are still opting to cut their losses and pay the current exit tax,” he said. “Unless Congress intervenes and extends these exemptions, the $5 million gift will drop to $1 million and the tax rate will climb to 55%. This, in addition to an increasing capital gains rate, is likely to give wealthy American citizens even more incentive to renounce their citizenship.”
But the door swings both ways. As some Americans leave in search of lower taxes or greener pastures—or both—foreign nationals with money to invest are taking advantage of the aforementioned “investor visas” under the EB-5 Immigrant Investor program. CNN reported that the State Department expects to issue more than 6,000 such visas in fiscal 2012, which would be an all-time record.
To qualify, individuals must invest at least $1 million in a new or recently created business, or $500,000 for businesses in rural or high-unemployment areas. And that’s not all; the investment must have created or preserved at least 10 full-time jobs for U.S. workers within two years. Should the lucky foreign investor meet these conditions, he and his family can achieve permanent residency, and three years after that can apply to become full citizens.
Business in investor visas is booming; last year 3,500 were issued, and the surge this year, as last, is coming mostly from China—whose residents gobbled up 70% of those granted last year. In fact, prospects are for the quota of 10,000 visas a year to meet its ceiling for the first time in the next year or two, thanks in part to family members accompanying investors.