- 1 Becoming a Tax Nomad
- 2 Expatriation Can be Great
- 3 Second Passport Tax Triggers
- 4 Exit Tax for High Net Worth Tax Nomads
- 5 Anti-Corporate Inversion
- 6 The US is a Great Place to Invest (Even for Tax Nomads)
- 7 FDIC Insured
- 8 Form 5472 for Foreign Person Tax Nomads
- 9 Interested in Expatriation from the U.S.?
Becoming a Tax Nomad
Tax Nomads: US Tax Filing Requirements & Pitfalls to Avoid: It sounds great, right? You are a US Citizen who earns significant income and/or have a high-net worth — and you hate paying taxes. Your income taxes are higher than you would like it to be — so you consider alternatives to your US Citizenship status. You consider pursuing a second-citizenship by descent — or possibly a Golden Visa. Online “Expat experts” with no real tax or legal experience guarantee you that they can whisk you away out of the US for an (exorbitant) fee, and dead drop you into a secret tax location — where you can enjoy tax freedom for the rest of your days. You live in one low-taxed country, invest into other low-taxed countries, avoid permanent residence, etc. They use fancy names to make their “strategies” sound even more alluring — but, is it really all that it sounds cracked up to be?
Of course, not.
If it was, everyone would do it. And more often than not, once you peel away the layers of perceived secrecy shrouded in mystery, you realize many of these strategies are basic, outdated — and probably never even worked in the first place. Now, you miss the United States and the relatively safe investment protocols — but the problem is that now you no longer have your US Citizenship — and it isn’t so easy to get back. You have to get in line with everyone else, and that can take years if not longer to facilitate.
Let’s walk through some key points of being a Tax Nomad:
Expatriation Can be Great
Each year we work with many High-Net-Worth Taxpayers who seek to expatriate. For some Taxpayers with dual-citizenship by birth, low — or no — exit tax (or have already factored exit tax into the equation) and/or already are established overseas — it is a great deal — but not for everybody. When we are approached by Taxpayers who do not have any experience with offshore living, and their only knowledge is from some promotional materials online (which are usually outdated and lacking any substance) — it is cause for concern from the outset for our team. That is because going offshore is a big step. While there are benefits for relocating offshore, there are many pitfalls and hazards to consider:
Second Passport Tax Triggers
Purchasing a second passport through the Golden Visa Citizenship-by-Investment (CBI) programs is expensive and time-consuming. In order to obtain the tax benefits of a second passport, the person must expatriate from the US. Otherwise, they may be subject to additional tax. That is because the US taxes its Citizens (and residents) on their worldwide income, which is based on US Person status and not residence of the Taxpayer. And, just obtaining second citizenship does not minimize US tax — if anything, it adds to it.
Exit Tax for High Net Worth Tax Nomads
For most high net-worth Taxpayers, all the planning in the world does not eliminate exit tax for covered expatriates — especially those expatriates with high-dollar pension plans with low step-up benefits, RSUs and significant growth stocks. The costs associated with expatriation exit tax must be factored into the equation at the outset.
If you are an entrepreneur who plans on inverting their US business, you must assess the IRS anti-inversion rules beforehand — or else the tax taint from any inversion may negate any benefit or perceived benefit the Taxpayer is imagining.
The US is a Great Place to Invest (Even for Tax Nomads)
When a person expatriates, they are often relieved to be out of the clutches of the IRS. But, as with any sense of euphoria — that high fades as well too — and the Taxpayer may then want to invest back into the US. Most passive income for nonresident aliens (expatriates) is taxed at FDAP rates of 30% and there are no deductions to offset the income. For some investments, such as rental real estate, the Taxpayer may be able to elect treat the income as ECI — and claim deductions…but only now they have to go back to filing 1040-NR tax returns, which defeats the main reason why people want to expatriate in the first place.
* If you expatriate to a country with no treaty, then you cannot reduce the 30% withholding based on treaty law application.
Most countries do not have FDIC equivalent accounts. You will probably want to keep some of your money “safe,” so you may want FDIC accounts. In order to open an account, you will be required to show ID, and usually explain your status, which may lead to more questions —
Form 5472 for Foreign Person Tax Nomads
If you are a foreign person who operates a foreign business that conducts business in the US (Even through a Disregarded Entity), you may now have to file a Form 5472 — or risk a penalty that starts at $25,000.
Interested in Expatriation from the U.S.?
Our firm specializes exclusively in international tax.
Contact our firm today for assistance with getting compliant.