Is Fleeing the Country a Smart Tax Strategy for You?

Eduardo Saverin
Eduardo Saverin

Facebook co-founder Eduardo Saverin has received a lot of criticism for his decision to give up his U.S. citizenship and emigrate to Singapore immediately before Facebook's (FB) IPO. But it's not a bad business move.

Under current law, those who renounce their citizenship have to pay U.S. tax on their gains as if they had sold all their assets -- with up to about $650,000 in gains exempt from tax. That will lead to a huge tax bill for Saverin, but once it's paid, any future price appreciation -- if there is any -- will go untouched by the IRS. And because Saverin is moving to Singapore -- where capital gains aren't subject to tax -- he won't have a tax bill at all from now on.

Leaving aside whether that is a travesty of tax justice or a perfectly valid way to take advantage of the tax system, should you consider becoming an expatriate? If the rich are running, is it worthwhile for the rest of us to consider following suit?

A Tax-Dodging Trend

Interest in giving up U.S. citizenship is nothing new. In the fourth quarter of 2009, more than 500 people gave up their citizenship -- more than double the number who did so in all of 2008. By last year, that number had jumped to almost 1,800.

Taxes can be an important element of the decision, but there are others. Recent regulations require citizens to report foreign bank accounts with more than $10,000 on deposit. For the millions of Americans who live and work abroad, it can be difficult to comply with such restrictions. In particular, with the U.S. now expecting foreign financial institutions to meet reporting requirements of their own, those institutions are less willing than ever to open accounts for Americans subject to those requirements.

Moreover, those who live abroad may reasonably believe that they get little benefit from the U.S. taxes they have to pay. Although foreign residents get a $100,000 exemption on income from U.S. tax, they have to pay tax on the excess -- even if they have no other connection to the U.S. other than citizenship.

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A Lower Bill...

The current exit tax rules are far less draconian than they used to be. Under previous law, expatriates had to file tax returns for 10 years even after they gave up citizenship. Now, once you get through the current exit-tax regime, you're done.

Moreover, you even get to keep some of the benefits you earned as a citizen. For instance, those who've given up their citizenship are still entitled to receive benefits from Social Security and Medicare, as well as any other pension benefits.

...but at what price?

But those who decide to give up their U.S. citizenship have to consider the other side of the coin: where they'll end up.

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Although rich people can buy their way into tax-haven countries that let them enjoy rock-bottom tax rates, average folks may not be so fortunate. Ordinarily, you need to have some sort of tie to a foreign country before you can emigrate from the U.S. to become a citizen in that country.

Moreover, in many countries that are attractive living sites, tax rates can actually be higher than they are for U.S. citizens. For instance, according to CNBC, in Ireland, the top income tax rate is 48%. The U.K. and Japan tax their top tiers at at 50% and Sweden's highest rate is 56.6%.

So if taxes are really your primary motivation, then you'll want to check closely to see whether you'll actually save any money by giving up your citizenship.

The uproar over Saverin's departure has predictably led to an effort to reinstate a more burdensome tax on those who renounce their citizenship. Two Democratic senators said last week that they would introduce a bill putting a 30% capital gains tax on expatriates, as well as barring them from coming back to the U.S.

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For most Americans, giving up citizenship isn't worth the hassle. But as the economy becomes more global, you can expect the trend of renouncers to continue rising.

Motley Fool contributor Dan Caplinger thinks about Canada sometimes, but is usually content with just visiting. You can follow him on Twitter here.

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