Avoiding Taxes

Today, you have several high profile individual taxpayers that have renounced their citizenship in order to pay fewer taxes, if any at all. The Internal Revenue Service has several credits afforded to those in the higher tax brackets but, it appears that they wish not to pay any taxes. As of 2013 77% of Americans will pay higher federal tax rates because the cuts in Social Security payroll taxes (increase of 1.9%) expired when Congress passed its tax package on New Year's Day. But the wealthiest household faces the highest tax increases. This has a number of expatriates renouncing their U.S. Citizenship which has doubled to 1,781. (Kim, 2013). A number of things should be considered if this is an option that is being considered, such as; what effects are there on you tax liability if you renounce citizenship or if you establish dual citizenship? Would either option warrant your particular case? And what alternatives are there to reducing your tax liability without renouncing your citizenship?

First let's, discuss why paying income tax was established for US citizens. Income taxes were considered a temporary tax to help raise money for war. In the War of 1812, the US first considered enacting an income tax, but the war ended before the tax was officially created. Yet, during the American Civil War, the first US income tax was created, but this one was meant only as a temporary measure to help pay for the war. It was repealed in 1972. In the 1890s, the US government was hoping to find a way to more evenly distribute the federal tax burden and thus looked at creating a permanent income tax. In 1913, the federal government was forced to collect taxes based on state population. Once the US government passed its first, permanent income taxes based on state population. Therefore, if you are US citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the US or abroad. Your worldwide income is subject to US income tax, regardless of where you reside. (Rosenberg, 2013)

According to a 2012 study published by the Research Institute of Industrial Economics "70% billionaires have migrated from higher to lower capital gains tax country ... One-third of the billionaires that moved went to small countries defined as 'tax havens,'" including Switzerland, Bahamas and Singapore. (Tharpe, 2012). Apparently, it is not difficult to renounce your citizenship from your country. You only have to appear in person before a US consular or diplomat officer, in a foreign country (US Embassy or Consulate) and sign an oath of renunciation. But, if forego your US citizenship you cannot reinstate later if you change your mind. But before you make this decision know that the US will not accept you back as a citizen if you change your mind. As in the case of Elizabeth Taylor she attempted to expatriate to keep her European income from being subject to American tax law. But was not approved by the State Department because she refused to disavow "all allegiance to the United States of America." (Kim, 2013). Renouncing your citizenship to avoid paying taxes may save you money in the long run. But, if you have a net worth of $2 million or whose annual income tax average for the past five years is $145,000 you are subjected to an "exit" tax, according to the Heroes Earnings Assistance and