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Americans renouncing Citizenship to avoid paying taxes?

Most people who are born in the United States or who purposely become citizens here know they are U.S. citizens. But many people who’ve spent their lives abroad and are citizens of other countries may be shocked to learn that they are considered U.S. citizens, and thus owe U.S. taxes.

Lifetime Abroad, Surprise at Home

The United States is one of only a handful of countries that requires

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its citizens to pay taxes on income, gains and assets no matter where they live. Expatriates or those with dual citizenship are especially vulnerable to getting a surprise visit from the IRS.

“After lifetimes abroad, many in this group believe that because exemptions left them owing no U.S. income tax, they had no obligation to file returns,” according to Genilde Guerra, a lawyer with the Law Offices of Kravitz & Guerra in Miami. “Many have been tripped up by a requirement that they still declare their foreign bank and financial accounts.”

“As a U.S. citizen, you are subject to the U.S. estate taxes, gift taxes, and generation-skipping transfer taxes on the transfer (as a gift or upon death) of any of your worldwide assets,” Guerra says. “U.S. citizenship may mean individuals owe taxes both to their home countries and to the United States on the same assets.”

Declare vs. Pay

Attorney Genilde E. Guerra
Attorney Genilde E. Guerra

While there can be severe tax consequences in the United States if you fail to declare your “worldwide income” to the IRS, many people need only do just that – declare the income – and may not necessarily pay taxes to the United States.

If you suspect you are an “accidental” American, says Guerra, consulting with a tax lawyer and an accountant is certainly the first order of business.

“Each situation is unique,” Guerra explains. “There are a lot of exceptions in the U.S. tax codes,” such as “exemptions and deductions which might be a benefit.” In addition, whether and how much you owe the United States could depend on treaties with the other country where you are located.

In general, people who live abroad are excluded from U.S. tax liability if they make $9,350 or less in a year or if they make $95,100 or more and only visit the United States for 35 days out of the year – but those amounts change every year, Guerra points out.

Pay Up or Take Off

In addition, if you renounce your U.S. citizenship, you don’t have to pay taxes here.

And Guerra says that’s happening more often than you might think. “The United States is going through a tax transition,” she says. Congress has only made small changes so far; however, those changes have caused more people to renounce their citizenship.

For instance, the American Taxpayer Relief Act of 2012, passed to avoid the so-called fiscal cliff at the beginning of 2013, reportedly sharply increased taxes on dividends and capital gains for U.S. citizens with incomes over $400,000 – a select group, to be sure, but also one that likely includes people who don’t know they’re U.S. citizens – or may not want to be anymore.

One rather public example of that problem is Brazilian-born Eduardo Saverin, co-founder and primary financier of Facebook, who was also a U.S. citizen – until 2011, when he reportedly renounced his citizenship before Facebook went public in 2012. Saverin’s reasons were tax-related, but he still ended up owing tax on his pre-IPO holdings in Facebook.

Some lawmakers didn’t take well to Saverin’s highly publicized move, and several senators even proposed legislation designed to discourage such attempts to dodge U.S. taxes. The “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy” Act (S. 3205) would reimpose taxes on ex-pats like Saverin and bar them from coming back so long as they refused to pay their full tax liability.

For more information please contact Genilde Guerra call (+1) 305-372-0222 or email Genilde at [email protected] Law Offices of Kravitz & Guerra, P.A.

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