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Does it make financial sense to give up citizenship?

It may sound at first like a political talking point to say that there are more and more Americans giving up citizenship because of high tax rates, however, recent data shows that in fact more people are pursuing this option and that in many cases it can be linked to taxes. In 2013 3,000 Americans decided to give up their citizenship, according to government publications. This is a major increase from the previous year, when only 993 people gave up their citizenship.

Looking back even further to the first stages of the financial crisis before the IRS had begun to crackdown on overseas taxpayers, only 231 people gave up their citizenship in 2008. A poll conducted by a financial consultancy group found that 68 percent of Americans living abroad had considered tax issues in assessing whether to maintain their citizenship.

The United States is unique in the fact that citizens living abroad must continue to pay taxes even if they do not earn money or have assets in the United States. Only one other country bases their taxes on nationality, the north African country of Eritrea.

The reason that people would consider giving up their citizenship is that this tax policy results in double-taxation for income earned abroad. It also gives rise to costs from tax preparation and compliance efforts, which can be time consuming and difficult. Calculating taxes incorrectly or making a mistake about what to report to the IRS can lead not to just to fines, but to prosecution for tax evasion, so the stakes are high.

Source: USA Today, "Americans abroad find citizenship too taxing to keep," Kim Hjelmgaard, March, 8, 2014

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