Why Thousands of Americans Renounce Their Citizenship Every Year

Back when the Affordable Care Act was still a new concept—that is, before we found out that it has exceeded even our most optimistic expectations—more than a few prominent Americans were threatening to expatriate from the US if Obamacare was successfully signed into law.

Well, disappointing though it may be, Rush Limbaugh is still living among us. Unfortunately, thousands of other Americans renounce their citizenships each year, at a rate that’s been consistently rising since 2008. Back in 1998, the number of citizens and green card holders cutting ties with the US was around 500. 2013 saw the largest spike yet, with a new high of 2,999 expatriation requests.

So what’s going on? The good news is that it has nothing to do with Obamacare. Unfortunately, we owe this trend to a much older problem.

Record-Setting Departures

The first and perhaps most significant factor influencing people to leave the US is American tax law. Alice Joseffer, on behalf of Hodgson Russ, says that the record-setting departures by high-income US citizens is “due to the burdensome tax obligations imposed on expatriates by the federal government.”

If you’re getting flashbacks to reading Atlas Shrugged in high school, know that you’re not alone. In Ayn Rand’s Bible-sized tome, men and women from all across the country dismantled their businesses and moved themselves to “Galt’s Gulch,” where they could live in peace far from the long arm of the US government, and where they could pursue their love of profit to the detriment of everything—and everybody—else in their lives.

But our story is a little different, because it’s not just business moguls who are trying to distance themselves from Uncle Sam; it’s also people with dual citizenship, and more generally, people who are less well off than the characters in Rand’s perennially popular book.

Little-Known Tax Laws

Many of the complications arise from something called the Foreign Account Tax Compliance Act (FATCA), which allows financial organizations to inquire into their customers’ citizenship status. Because of the complicated (and oftentimes extremely opaque) nature of our immigration laws, even children and grandchildren of US citizens, even if they’re living abroad, may be considered US citizens and, consequently, on the hook for unpaid taxes.

It’s a weird situation, and it shifts the burden of accountability to people who may have no idea they owe money in back taxes. Take, for example, Ms. Patricia Moon. She is descended from a line of Quakers that lived in the New World before we ever declared independence from Britain. Despite her family’s close ties to the US, Ms. Moon has been living in Toronto, Canada, for 30 years. She moved there to pursue love.

Imagine her surprise, then, when the US kicked off a campaign in 2009 to “reclaim” more than $6 billion in taxes from American citizens living abroad. Very suddenly, Ms. Moon had reason to fear that the IRS could target her with a nearly half-million-dollar penalty for undeclared checking and savings accounts. This, despite the fact that the accounts have never housed more than $102,000 of her family’s money, and weren’t deliberately hidden from the IRS.

There are millions of Americans who find themselves in this unenviable position, and thousands of them are leaving their US citizenship behind each year. They have no other choice.

It’s Not About Tax Evasion

It’s no secret that wealthy Americans are fond of stashing their assets in overseas bank accounts; it’s something that’s actually expected to become a campaign issue as we ramp up to 2016. But this kind of tax evasion is a far cry from the kind of inadvertent ‘lawbreaking’ that people like Ms. Moon are now being accused of.

But here’s why this is happening: ever since the Civil War, the US government has taxed its citizens not just on income they earn domestically, but also on income they earn while living abroad. Welcome to America: where citizens in the year 2015 are being taxed by a country they haven’t lived in for decades, via a law that’s now over 150 years old.

Ms. Moon’s story ends with her visiting a US consulate in 2012 to renounce her US citizenship. After conferring with experts on tax law, she found that even her retirement was in jeopardy: she expected to have to sell their Toronto home to square things up with the IRS—a home that was supposed to fund their retirement to the tune of $800,000.

Instead, Ms. Moon paid a $450 processing fee, was given official notice that her ties to the US had been severed, and was allowed to continue living her life in peace. She calls that fee the “saddest $450 she’ll ever spend.”

I’m not saying that Ms. Moon’s solution was right, but it was most certainly necessary to remedy her particular situation, as it will be necessary for many other Americans until we take another look at our tax law as it applies to citizens living abroad.