Boris Johnson’s decision to renounce his American citizenship made a number of headlines this year. Though it may have been among the most high-profile examples, Johnson’s case is, in fact, one of many. In 2016, a record number of individuals did the same.
Figures released by the US Treasury department showed that 5,411 individuals gave up their American citizenship in that year. This figure marks a 26% increase on 2015.
US Tax Burden
Born in the US, Johnson was a citizen of the US, where he lived until he was five years old. The tax implications of US citizenship can be onerous, as Johnson found out when he was hit with a $50,000 capital gains tax by the IRS. While the sale of his London home did not attract tax in the UK, it was subject to significant tax under the US rules.
The tax system in the US means that citizens living outside of the country must continue to file tax returns each year. If the amount paid in tax to their resident country is lower than what it would be in the US, they are required to pay the IRS the difference.
Despite Johnson’s very public outrage over the tax matter (which he deemed “absolutely outrageous” during a 2014 interview with National Public Radio), it was reported that he did later settle the bill with the IRS.
Asked during that interview whether he would pay the tax, he responded:
“Why should I? I think, you know, I’m not a … I haven’t lived in the US for, you know, well, since I was five years old … I pay the lion’s share of my tax, I pay my taxes to the full in the UK where I live and work.”
Of course, giving up citizenship does not free you from a current tax bill. In fact, a requirement of renouncing citizenship is proof of five years of US tax compliance. In some cases, an exit tax (or expatriation tax) must also be paid.
FATCA
While tax may be a key motivator for many people to give up their US passports, it is of course one of many possible reasons. Family and other personal reasons will often be in play, too.
What has been noted though, is that the number of individuals renouncing US citizenship increased after the introduction of the Foreign Account Tax Compliance Act (FATCA).
The Act imposes a requirement on non-US banks and financial institutions to provide bank data on US account holders. Failure to reveal such information can attract a significant penalty. It has even been reported that—through a desire to keep the IRS happy—some foreign banks do not want American account holders.
The decision to renounce citizenship of any country is always a difficult and personal one. Though tax cannot be the only reason, it seems certain that it is among the key considerations.
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