American citizens who move to another country still have the responsibility to report their income to the Internal Revenue Service (IRS). Therefore, sometimes, in addition to the taxes paid in their country of residence, these citizens still need to pay taxes in the United States. It is not surprising that the idea of renouncing U.S. citizenship is considered by these citizens.
However, some experts advise against this radical step.
Alex Ingrim, a financial consultant at Chase Buchanan Wealth Management, says that “very rarely do you suffer double taxation.” Moreover, renouncing citizenship is not an easy process and it can be difficult to reverse if you change your mind in the future.
‘The Pain of Being American’
Before moving abroad, make sure to understand your income situation: whether you will be working or relying on retirement.
The U.S. and the country [of residence] may have an income tax treaty, an inheritance tax treaty, or they may have a normalization agreement that treats retirement income like Social Security. The rules change according to these agreements.
For example, the U.S. and some European countries, such as Portugal, have agreements that allow those who file tax returns in the U.S. to use the credit for what was paid in Portugal to extinguish their tax obligation in the U.S.
The bad news for Brazilian-Americans is that there is no double taxation agreement between the U.S. and Brazil.
Why Do American Expatriates Renounce U.S. Citizenship?
Americans who give up their citizenship do so in search of investment options or jurisdictions with lower taxes. For example: an American moves to a place with little or no tax, like Monaco or Dubai. However, they still have the U.S. tax responsibility. For these individuals, it often becomes an interesting option to renounce American citizenship.
However, there is one piece of information worth highlighting: upon renouncing American citizenship, you may have to pay “exit taxes” as an expatriate under the Heroes Earnings Assistance and Relief Tax Act (HEART) of 2008.
In the end, when it comes to taxes in the U.S., you never come out ahead.
Source: CNBC