The threat of higher US taxes, combined with other factors, could produce a sharp rise in the number of Americans seeking to give up their citizenship, an advisor working in the space says.

The number of US citizens seeking to renounce their nationality will increase “dramatically” because they want to break free as taxes rise, an advisor handling such individuals has told this publication. 

The US taxes its citizens on a worldwide basis - the only major country to do so - and expats must file annual returns to the Internal Revenue Service. With the Biden administration expected to push up income, capital and estate taxes in the coming year or so, high net worth Americans are in the firing line. And for expats, they can only escape the net if they give up their citizenship. 

David Lesperance, a Canadian-born advisor working with HNW individuals seeking to mitigate heavy taxes, said this is a busy time, and not just because of the situation HNW Americans find themselves in.

The pandemic has also interrupted renunciation processes. As countries open up there could be a rush of cases. 

“It must be remembered that since the start of the pandemic, many US missions (where one must renounce citizenship) have been closed or operating at a reduced capacity. For example, I recently received an email from the US Embassy in Berne, Switzerland, saying they had a waiting list of 400 people for renunciation appointments….and that is only one of 307 US foreign missions! So in summary, the rate of expatriation will continue to accelerate dramatically,” he said. 

Numbers of renunciations grew fast last year, in spite of the disruptions to business life from COVID-19, according to Americans Overseas, a Europe-based organization specializing in US tax preparation. A record 6,705 Americans gave up their citizenship in 2020, and that was up 260 per cent from 2019 when 2,577 US citizens did so. The rise is all the more striking considering how many US consulates were shut for much of 2020 as the pandemic raged. The previous record year for renunciations was 5,411 cases in 2016.

For so long, the US has been a beacon attracting immigrants, including HNW individuals seeking to escape high taxes, oppression and lack of opportunity. The shift towards renunciation by wealthy people takes getting used to. A list of thousands of such expatriating Americans is reported by the Federal Register.

So why are people getting out?

“Tax is almost always a major factor but rarely the only one. Control over strategic philanthropy; disenchantment with political partisan paralysis; concerns over civil unrest and increasing societal violence amplified by widespread gun ownership are also frequently mentioned. Add to this a realization that the majority of wealthy people have successfully lived their entire lives without a US passport or full-time residence in the US, and you have a decent understanding of why expatriation is exploding,” Lesperance said. 

“All of these drivers have come to light because the pandemic has forced many to overcome the inherent life inertia of their previously carefully curated lives. We all know the poster showing the island of Manhattan as the center of the world. Those people were driven out of NYC and discovered that they could survive and thrive elsewhere. This gave them the perspective to look at the tax future that the NYC Mayor; governor and federal politicians had planned for them. Since a body in motion tends to stay in motion, many decided to not only move to a low tax state but also equip themselves to legally and permanently leave the US tax system,” he said. 

There’s little doubt that tax hikes in some form are coming. Wealth managers have told Family Wealth Report that tax hikes, both at federal and, in some cases, state level are expected in the wake of the COVID-19 pandemic. US Senator Elizabeth Warren is also pushing for a US wealth tax.

US citizens cannot easily flee the system by moving abroad. Even before the tighter controls enacted under the US Foreign Accounts Tax Compliance Act (FATCA), any US citizen/Green Card holder was in the tax net, a situation affecting only one other country: Eritrea. Other major nations tax citizens by residence.

Lesperance has run his eponymous law firm - Lesperance & Associates - since April 2017; prior to this he was at David S Lesperance Professional Corp, from 1994 to March 2017. He has been a lawyer at different firms before that. He was educated in Canada.

Lesperance has strong views about tax, arguing that the idea that wealth taxes, as proposed in the UK recently, would be a “one-off” measure is a myth. “There’s no such thing as a one-time tax. My clients are under the operating assumption that a wealth tax would be permanent,” he said.