Taxes - Am I naive or just uneducated?

[rms977]

Certainly I am in shock.

I've been planning my ER for a few years now and I'm looking at making it a reality by the end of 2008. I am looking at moving overseas and I have researched the tax implications/advantages of my future new home, which has a tax treaty with the US. But I got to thinking that since I plan to become a citizen of my new country, why should I retain citizenship in the US? I know that as long as I am a US citizen, I will have to pay US taxes no matter where I live. This, in principle bothers me, because I cannot understand why I have to pay taxes when I don't live in the US. So I thought, ok, renounce my US citizenship. Well, you can't do that for tax purposes. OK. So I won't, I'll do it for the simple fact that I love my new country, I will have become a citizen of my new country, and I have no intention of returning to the US. But then, I looked into what would happen if I kept my money in the US because I have IRAs and pensions (I know what to do about SS). So it appears that if I renounce my US citizenship, but still have this money in the US, I will be taxed as a non-resident alien (that was a new term for me) at the rate of 30% (I think it's 30%, if I recall correctly). So it would be better for me to keep my citizenship and pay the US taxes because I would have a lower rate than 30%.

I am just amazed at how far-reaching the US tax-hold is. I had no idea that they could do this.

Meanwhile, I am looking for advice on how to move money out of the US to my new country in a manner that is most financially beneficial to me. I am looking for how to find someone who could offer this professional advice. I have no idea how to find these kind of financial advisors since most people who do this kind of thing are multi-millionaires and unfortunately I am not. My financial advisor is trying to find someone to answer my questions, but no luck so far.

 

[teejayevans]

Before you renounce your citizenship, you need to be citizen of another
country. Check the taxes of other countries before you complain about
US tax laws.
TJ

 

[LOL!]

Generally you get what you pay for.

Also why are you so worried about taxes anyways? It reads like you are so poor that you can't live in the US. If you have little or no income, the US doesn't make you pay taxes anyways. Have you even figured out what you pay in taxes now? What you would pay in taxes if you lived overseas?

When I lived overseas and was poor, I paid no taxes.

 

[bpp3]

But then, I looked into what would happen if I kept my money in the US because I have IRAs and pensions (I know what to do about SS). So it appears that if I renounce my US citizenship, but still have this money in the US, I will be taxed as a non-resident alien (that was a new term for me) at the rate of 30% (I think it's 30%, if I recall correctly). So it would be better for me to keep my citizenship and pay the US taxes because I would have a lower rate than 30%.

I am just amazed at how far-reaching the US tax-hold is. I had no idea that they could do this.

Withholding tax on dividends paid to non-residents is something a lot of countries do, so it is not unique to the US. (It is, after all, the source of the Foreign Tax Credit you may have if your mutual funds hold foreign stocks.) 30% is the maximum, default rate if your future country of residence doesn't have a tax treaty with the US; it may be lower if there is a treaty -- something to check out. On the bright side, as a non-resident alien you would not owe any capital gains taxes, so you might still come out ahead depending on what kind of investments you hold.

Meanwhile, I am looking for advice on how to move money out of the US to my new country in a manner that is most financially beneficial to me. I am looking for how to find someone who could offer this professional advice. I have no idea how to find these kind of financial advisors since most people who do this kind of thing are multi-millionaires and unfortunately I am not. My financial advisor is trying to find someone to answer my questions, but no luck so far.

Don't worry, non-millionaires move money across borders, too. I find ordinary bank wires work just fine for cash. If you want to move shares in kind without having to sell them first and take the cap gains hit, you may be out of luck; you could perhaps wait until after you have become a non-citizen, in which case you could liquidate without the cap gains hit and squirt the cash over. But, your new country of residence may tax those gains anyway -- something else to check out.

Added: My remarks apply to taxable investments. If your IRAs are traditional IRAs (are those withdrawals taxed at 30%?), you might look into doing roll-overs to Roths while you are still a citizen, if your tax rate is lower than 30%. Just a thought, check for yourself of course.

Out of curiosity, what kinds of accounts are you talking about? Trad. IRA, taxable, ...? To which country are you emigrating? (Don't have to answer these questions, of course.)

 

[retire2india]

Not sure if you are aware of this, but the rules regarding taxation of expatriates changed in 2004. You may have to continue paying US taxes for 10 more years even if you renounce your US citizenship. It doesn't matter whether you gave up your citizenship for tax purposes or not.

The following links have more details:

Expatriation Tax
http://www.hayduklaw.com/weekly.htm

Nigel
Retire To India

 

[MasterBlaster]

Taxes - Am I naive or just uneducated?

Death and Taxes...

Did you really think that you could skip away and not have to pay any taxes ?

 

[laurence]

Putting aside my misgivings of renouncing citizenship of this country in the first place, is it really worth a small tax savings to give up the guaranteed safe harbor if your new country gets a little sketchy (wars, xenophobia etc.)?

 

[Nords]

... if your new country gets a little sketchy (wars, xenophobia etc.)?

You mean, other than America?

 

[laurence]

You mean, other than America?

Well hey, being a old white male in this country is still safe.

 

[donheff]

is it really worth a small tax savings to give up the guaranteed safe harbor if your new country gets a little sketchy (wars, xenophobia etc.)?

You mean, other than America?

Darn, Nords beat me to that one Not withstanding that humor, I can't imagine giving up US citizenship - that is quite a step. Woul you even be welcome back to visit friends and relatives?

 

[rms977]

Well 1 out of 9 responses of value isn't too bad. Thanks bpp3

Yes, I know I have to get citizenship in another country first - I have already looked into this - it will take at least 7 years. I have already checked the tax laws of the country I plan to live in and they are quite favorable for retirees. Much more favorable than the US. That is one of the reasons I started researching this. That and the quality of life and cost of living.

Yes, I know the tax laws have changed regarding taxing expatriatsand right now I would not have to pay for 10 years, but in 7 years from now, I may be in a situation where I might have to pay. It all depends on how well my portfolio does.

I'm not concerned at all about the mechanism of how to move money to my future home, it's the IRAs and pensions I am trying to sort out. I do plan to move as much as I can into my Roth IRA, but my MAGI is too high so it is not something I can do this year. Maybe next, but then if I stop working, I can't rollover anythng.

LOL! - Why would you assume that I am so poor that I cannot live in the US? What a rash and completely erroneous assumption to make! And Trust me, I know EXACTLY how much I pay in taxes right now and it is not something that I am happy about.

Laurencewill, I am not concerned about having a safe harbor in the US. This is not something that worries me.

Donheff, if I gave up my citizenship, I could come and visit family and friends but would have to do so as a foreigner so possibly a visa would be required. Not a worry as I suspect my family and friends would want to visit me.

At the risk of getting slammed further, I will not mention where I am planning to move to. Suffice it to say that I am researching this thoroughly.

I haven't lived in the US since 1994 and I have still paid a ton of US taxes.
I was just a little surprised to find out that I would have to pay US taxes even if I was no longer a citizen. I certainly expect to pay taxes to the country where I will be living.

 

[Sam]

Familiar?

 

[laurence]

Uh, didn't you say Cyprus a few times already in your other posts? Sorry if you feel slammed. Disparaging 8 out of 9 posters who respond to you is a surefire way to get a lot of feedback!

 

[JustCurious]

So let me get this straight....you avoided paying taxes on the money that you contributed to retirement plans with the agreement that when you take the money out in retirement, you would then pay taxes on that money, and now you want to skip out on paying the deferred taxes by moving to another country and denouncing your citizenship? You should be ashamed.

 

[samclem]

I know many people who travel extensively, and none of them regard their citizenship as lightly as you seem to. We're not talking about changing your hairstyle here.

Pay the taxes you owe on your deferred accounts, then be on your way. Take some others with you, if you can convince them to leave. It would be good for the country if folks who honestly don't feel any special affinity for the US would depart.

When you arrive at your new home, wander by the US Embassy and behold the line of people hoping to get a visa and come to the U.S. Chumps! Tell them your story, I'll bet you'll get some great looks.

You'll also be helping the Social Security system (you won't collect any, right? Remember, these aren't savings accounts) and Medicare.

PS: In answer to the question you posed in the title of your post: Yes, I think so.

 

[teejayevans]

I haven't lived in the US since 1994 and I have still paid a ton of US taxes.
I was just a little surprised to find out that I would have to pay US taxes even if I was no longer a citizen. I certainly expect to pay taxes to the country where I will be living.

Technically if you read the links, you only have to pay if you spend more
than 30 days in the US, so renounce your citizenship and stay out...no
US tax. Seems reasonable to me...
TJ

 

[bpp3]

I'm not concerned at all about the mechanism of how to move money to my future home, it's the IRAs and pensions I am trying to sort out. I do plan to move as much as I can into my Roth IRA, but my MAGI is too high so it is not something I can do this year. Maybe next, but then if I stop working, I can't rollover anythng.

If it is Cyprus, there seems to be a provision in the tax treaty for pensions:

ARTICLE 23
Private Pensions and Annuities
(1) Except as provided in Article 22 (Governmental Functions) pensions and other similar
remuneration paid to an individual who is a resident of a Contracting State in consideration of past
employment shall be taxable only in that Contracting State.

So if you are a citizen and resident of Cyprus only, you would only owe Cyprus taxes on the pension.

Study the stuff here: Cyprus - Tax Treaty Documents

 

[bpp3]

Donheff, if I gave up my citizenship, I could come and visit family and friends but would have to do so as a foreigner so possibly a visa would be required.

My (possibly erroneous) understanding is that former US citizens are ineligible for the visa waiver program. So instead of just showing up and getting an instant 90-day permit on arrival, you would have to go to the embassy for a visa before visiting, which could theoretically be denied if the INS decided that you really were a tax-evader after all. (I don't know if this has ever really happened, though.)

At the risk of getting slammed further[...]

Not to get too far into this aspect, but it doesn't strike me that most Americans are in a logical position to criticize someone else for changing their citizenship, since most of them wouldn't even be Americans if they or their ancestors hadn't done the same thing. I'm sure it is not something anyone does lightly.

 

[teejayevans]

Not to get too far into this aspect, but it doesn't strike me that most Americans are in a logical position to criticize someone else for changing their citizenship, since most of them wouldn't even be Americans if they or their ancestors hadn't done the same thing. I'm sure it is not something anyone does lightly.

My ancestors didn't come here to avoid paying taxes. Most people would
NOT leave their country just to avoid paying taxes. It's the price of
admission, most people understand that taxes are a necessary evil, and
are willing to pay their share.
Warren Buffet said he should be paying more taxes, google
"warren buffet taxes secretary" for more info.
TJ

 

[bpp3]

Most people would NOT leave their country just to avoid paying taxes.

I didn't get the impression that that is what rms977 is contemplating, either. It sounds like the plan to move and take on a new citizenship has already been made, and the only question is whether it makes sense to keep the original one as well. I certainly don't condone tax evasion or avoidance of paying one's fair share either, but it is not evil to consider the legal ramifications of the various possibilities. Suppose it turns out to be cheaper to keep US citizenship (which sounds like a distinct possibility in this case). Would you be equally offended at the original poster hanging onto a US citizenship that is not really being "used," merely in order to "game the system"?

 

[LOL!]

LOL! - Why would you assume that I am so poor that I cannot live in the US? What a rash and completely erroneous assumption to make! And Trust me, I know EXACTLY how much I pay in taxes right now and it is not something that I am happy about.

I'm sorry but you also wrote the following in your OP:

So it would be better for me to keep my citizenship and pay the US taxes because I would have a lower rate than 30%.

I just inferred you were poor because your tax rate would be lower than 30%.

 

[Elspeth]

Not sure if you are aware of this, but the rules regarding taxation of expatriates changed in 2004. You may have to continue paying US taxes for 10 more years even if you renounce your US citizenship. It doesn't matter whether you gave up your citizenship for tax purposes or not.

The following links have more details:

Expatriation Tax
weekly

Nigel
Retire To India

Your link talks about "U.S. citizens who have renounced their citizenship and long-term residents who have ended their US residency for tax purposes." Does that refer to intention or effect? I mean, if a long-term resident decides to retire back to the old country out of homesickness or something and not for tax purposes, I assume it wouldn't make any difference to the IRS.

 

[teejayevans]

Would you be equally offended at the original poster hanging onto a US citizenship that is not really being "used," merely in order to "game the system"?

Actually I wasn't offended at all by original poster,
but more by your comment that we are in the
our position because our ancestors did the same thing many years ago
is not correct, I'm betting most US ancestors (with some obvious
exceptions: african americans, american indians) came here for a chance
at a better life. And I have great respect for them and others (even today's
immigrants) that come here to do that.
Those that come here to avoid paying taxes in their home country don't
get my respect.
TJ

 

[FinanceGeek]

One thing I've always wondered about - the rules on emigration tax seem to be tied to having a net worth which exceeds the Federal estate tax threshold. This number (I think $2m now) is scheduled be unlimited in 2010 I think, and then revert back to $1m afterwards.

Does that mean that 2010 provides a 1 year window of tax-free emigration?

 

[bpp3]

Actually I wasn't offended at all by original poster,
but more by your comment that we are in the
our position because our ancestors did the same thing many years ago
is not correct[...]
Those that come here to avoid paying taxes in their home country don't
get my respect.
TJ

I didn't mean to suggest that anyone's ancestors were tax cheats. Sorry if I gave that impression. I was talking about the broader issue of expatriation, for whatever reason. Perhaps I had a mistaken impression that the mere idea of expatriation was rubbing some folks the wrong way.