Considering renouncing US citizenship? #citizide – There are times when US citizenship can save you from foreign taxes!

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Should other nations be permitted to impose taxation on U.S. citizens or corporations?

At first blush, the question sounds absurd. Is there something about being a U.S. citizen that should exempt individuals from taxation in or by a another country? Some time ago, this question was explored in a discussion on a Facebook group. Interestingly, most participants thought the discussion was absurd and did not take it seriously. But truth can be stranger than fiction. When it comes to taxation there can be some benefits to being a U.S. citizen. In fact, in certain cases, U.S. citizenship can act as a “cloaking device” – a device that shields you from taxation in another country.


The two certainties are “death and taxes” …

It’s in the area of “death” where U.S. citizenship can be helpful. Sometimes it can be to your benefit to die as a U.S. citizen. Sometimes U.S. citizenship can be helpful when somebody dies leaving you part of their estate.
What follows are some categories where U.S. citizenship can protect you from taxation. These possibilities should be considered prior to renouncing U.S. citizenship.

1. Somebody dies leaving a U.S. citizen an inheritance: Inheritance taxes, tax treaties and U.S. citizenship
The U.S. Internal Revenue Code does NOT impose taxation on the recipient of bequests. The U.S Internal Revenue Code may impose taxation the estate of a decedent. Some countries countries do impose taxation on the recipient of bequests. Some countries impose taxation on BOTH the Estate and the recipient of the Estate (Inheritance Tax). Although both Estate Taxes and Inheritance taxes are triggered by death the differ in that:

Estate and inheritance taxes are broadly similar because both are generally triggered by death. Estate taxes are levied on the net value of property owned by a deceased person on the date of their death. In contrast, inheritance taxes are levied on the recipients of the property. Both of these taxes are generally paired with some kind of gift tax so that they cannot be avoided by simply transferring the property prior to death.

https://taxfoundation.org/estate-and-inheritance-taxes-around-world/

Citizenship, tax treaties and inheritance taxes …
A comprehensive list of what countries have Estate and/or inheritance taxes is here.

Let’s assume that a U.S. citizen is a tax resident of country that has an “inheritance tax”. Let’s imagine that this U.S. citizen receives a bequest of U.S. property from a relative living in the United States. Well, there are some tax treaties that appear to exempt U.S. citizens from “inheritance taxes” if and only if the person receiving the bequest is a U.S. citizen.

For example:

Ireland and Germany are possible examples. There are likely more examples.

My point is:

If you a U.S. citizen living outside the United States as a tax resident of another country, you should ask whether your U.S. citizenship shields you from certain kinds of taxes because of the provisions of a tax treaty.

Ireland

Germany

Bottom line: When it comes to Estate and inheritance taxes, treaties can be a big help. But, U.S. citizenship may be a condition to being eligible for the tax treaty benefits.

2. You die owning a significant number of U.S. situs assets

The United States has a robust Estate Tax system. At the risk of oversimplification, U.S. citizens are entitled to (as of the time of writing this post) a lifetime exemption of $11 million U.S. dollars before the Estate is subjected to the U.S. Estate and Gift Tax regime.

Q. What if you are NOT a U.S. citizen who is NOT domiciled (whatever that means) in the United States and you die with assets in the United States?

A. You are subject to the U.S. Estate Tax regime if your U.S. situs assets are valued at $60,000.00 or more!!
For some, this may be a reason to NOT renounce U.S. citizenship.

This issue was recently considered in an excellent post by Virginia La Torre Jeker which includes:

Should I Care If I Am A US “Resident”?

In a word, “yes”, you should! A foreign person who is considered a US “resident” will be subject to US Gift tax on transfers of property exceeding US$15,000 per donee in a single calendar year, regardless of where the transferred assets are located. An exemption is available under the Unified Credit rules – generally, to the extent the Unified Credit is used for lifetime gifts it cannot be used to lessen Estate Tax due upon death. An exemption equivalent of approximately $11.2 million in value of gifts is available under current law. For calendar year 2019, the basic exclusion amount will be $11.4 million. Once a gift or gifts to a single donee in the calendar year exceeds the annual US$15,000 permissible threshold, the donor must file a gift tax return and can then use some of his Unified Credit. Even though gift tax is not due, the filing of the gift tax return is very important. The filing crystallizes the transaction as having been a gift and keeps an “accounting” of the remaining Unified Credit.

At death, a resident’s estate is subject to Estate tax based on the value of the worldwide assets owned by the decedent at death. The Unified Credit can provide an exemption amount of approximately $11.2 million of estate assets under current law ($11.4 million for 2019), provided the amount was not used previously to reduce Gift tax liability.
The maximum rate for each of the US Gift and Estate taxes is currently 40 percent (as at 2018).

To the contrary, a foreign national who is not a US “resident” is subject to US Gift tax only if two requirements are met: The transfer must be one of tangible property (gifts of intangible property are exempt), and, the transfer must occur within the US. There is no exemption amount under the Unified Credit rule, discussed previously; but the US$15,000 per donee per calendar year does apply to a non-resident.

With respect to US Estate tax, nonresidents are taxed only on the value of assets located or “deemed located” within the US (e.g., stocks of US companies are deemed located within the US even if the share certificates are located abroad). A small exemption amount of $60,000 is available for such estates of nonresidents (not the generous Unified Credit amount available to US “residents”).

3. You die as a former U.S. citizen who was a “covered expatriate” when he renounced and now wish to leave assets to a U.S. citizen

See in particular the discussion beginning at the 50:45 mark!!!! Excellent summary of how the Section 2801 Tax hurts America and American citizens.

(A more comprehensive description of the problems of Section 2801 is discussed on the IRSMedic blog here. Note that if a Green Card holder abandons the Green Card he/she may be subject to the S. 877A Expatriation Tax.)

As per Internal Revenue Code, Section 2801:

If you renounce U.S. citizenship and are a “covered expatriate” at the time of renunciation any subsequent gift or bequest to a “U.S. Person” will be subject to a 40% tax assessed against the recipient of the gift or bequest. I have previously written on this topic here.

I suggested that:

The S. 2801 rules are important and need to be understood. They are unlikely to prevent “middle class” Americans abroad from renouncing citizenship. On the other hand, for high net worth individuals, the S. 2801 rules must be well understood and carefully considered.

Summary …

It is very difficult to live as a U.S. citizen outside the United States. Hence, the pressure to renounce U.S. citizenship is enormous. But, after you renounce your U.S. citizenship you will:

1. No longer be a U.S. citizen and may therefore lose some tax treaty and legislative benefits; and
2. Will be treated as a citizen of your country of citizenship.

In my experience, these issues are NOT sufficiently considered by those renouncing U.S. citizenship.

John Richardson

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