The US is perhaps the only country that wishes to tax its citizens even if they are living abroad and their income is generated outside the US. Millions of US citizens and Green Card holders living and working outside the US are grappling with this issue
There are several reasons why American expats are considering renouncing their citizenship, and the tax burden tops them. Administrative hassles such as reporting all bank and financial accounts have added to their woes.
Americans living in India would find its tax regime much more liberal on investment income compared to the US. Dividends from companies are tax exempt, as also long-term capital gains on listed equity shares. If the taxpayer is a US citizen or Green Card holder in addition to being an Indian tax resident, he/ she will have to pay additional US taxes in excess of 20 per cent on such investment income.
The US also has an onerous regime of estate taxes, which currently does not exist in India
Where the long-term intention is to reside and work in India, from a purely economic standpoint it makes greater sense for the individual(s) to give up their US citizenship. However, it is no easy task relinquishing a US citizenship — you first have to deal with the “exit taxes” if
your averageannual net income tax liability for the five tax years ending before the date of your expatriation is more than $155,000, if you expatriated in 2013;
your net worth is $2 million or more on the date of your expatriation;
you fail to certify that you have complied with all federal tax obligations for the five tax years preceding the date of your expatriation.
Individuals in the low-income bracket and with a global net worth less than $2 million are the fortunate ones, who can give up their citizenship/ Green Card without an exit tax.
Computing exit tax
You have to pay an exit tax on the mark-to-market gains on your global assets. In other words, you will be taxed on the notional gain if you sold all your global assets on the date of expatriation. There is a basic exemption of $651,000 for tax year 2012.
This amount is indexed for inflation and changes every year.
For example, if the notional gain on the deemed sale of your global assets is $4 million, you would get an allowance of $651,000, and pay exit tax on $3.349 million.
Where the majority of the assets are illiquid, such as real estate, the taxpayer may have a liquidity issue even if he/ she is willing to pay the taxes.
Giving up citizenship
Approach the US Consulate and formally apply for renunciation of your US citizenship in the prescribed forms.
File a final tax return with the US Internal Revenue Service.
The final tax return should be accompanied by Form 8854 (Annual Expatriation Statement), including a statement of your net worth on the date of expatriation.
If exit taxes apply, you will have to pay them along with the final return.
Americans living outside the US need to evaluate whether they are ready to bear the increased economic burden of maintaining their US residency. If they decide to give up their citizenship, they should first carefully consider the implication of exit taxes.
Franklin Kandukuri and Renu Rana, Grant Thornton, contributed to the article.
The author is Director, US Taxation, Grant Thornton India LLP