Passports & Tax Implications for Americans, Citizens & Expatriates

Passports & Tax Implications for Americans, Citizens & Expatriates

Tax Considerations for Passports by American Citizens & Expatriates

Tax Considerations for Passports by American Citizens & Expatriates: When a US Person expatriates from the United States, oftentimes their wanderlust leads them on a global adventure (at least for a few months). Without the burden of the US tax system and worldwide income, expatriates have many options available to them. Where they should become a citizen and reside will depend on their lineage — and investment goals. While some passports may cost in the millions of dollars, others require a much less-steep investment. Before narrowing down where the expatriate may want to relocate, it is important to research passport opportunities in conjunction with tax implications and consequences. Let’s take a look at the tax considerations for passports and residence by American citizens & expatriates.

Expat vs Expatriate

Oftentimes, when a US Person wants to move overseas they are referred to as an Expat. Technically, the term Expat is short for expatriate, but from an IRS tax and legal perspective the two terms have very different meanings. The distinction between the terms (1) Expatriate and (2) Expat can mean the difference between (1) formally abandoning US status by renouncing US citizenship or relinquishing Permanent Resident status — (2) or simply relocating out of the United States for an extended period of time. In the former situation, a person can relieve themselves of US taxation on their worldwide income and reporting of global assets — but in the latter scenario, the person is still subject to US tax on their global income and stuck in the FBAR and FATCA matrix.

Passport and Tax Implications

When it comes to obtaining a passport and determining whether the Taxpayer is going to become a resident of that country or just a citizen for passport/travel privileges, there are many moving parts to consider. What may good planning for one person, may not be beneficial for the next. For example, if a person generates all of their income from passive assets such as interest and dividends — then their tax planning strategies will differ from an individual who may be relocating their business overseas in a foreign country. In the latter situation the income generated is earned income — and the tax consequences may be different depending on the country of source of the income. In addition, if a person has significant wealth or is planning on receiving a distribution of wealth by way of a gift or estate transfer — it is important to assess whether there is a gift or wealth transfer tax in that specific country and if so, are there any exemptions, exclusions and limitations that may apply.

Passport vs Residency

Another important consideration is whether the taxpayer will be residing in the same country that they obtain the passport. For newly minted expatriates who may have lived their life as a US citizen, they are used to paying tax on their worldwide income to the IRS. In other words, under US tax laws it didn’t matter which country they resided in — or where the income is being sourced — it was all taxable. That is not how it works in other countries.

Generally, countries only tax the residents of that country on worldwide income  — even if they are a citizen of that country. Stated another way:

  • If a person is a citizen of country A, but
  • Resides in country B, then
  • Country A does not tax the citizen on their worldwide income because the citizen is not a resident of County A, but rather they are a resident of country B (exceptions, exclusions and limitations may apply per country)

Common Tax Questions to Consider:

  • What is the Net Worth of the Taxpayer?
  • Will they be investing in Property (Real Estate Tax)?
  • Is there passive income from within the country?
  • Is there passive income from outside of the country?
  • Is there earned income from within the country?
  • Is there earned income from outside of the country?
  • Are there business operations within the country?
  • Is the business income generated from within that country?
  • Is there any upcoming transfers of wealth or large gifts?

Let’s Take a Look at Passports in General

When it comes to passports and US citizens moving abroad, the key issues become:

  • Which passport provides for the most destinations?
  • Which country do I have money age and possible easy access to citizenship and a passport?
  • Which countries provide citizenship by investment?
  • Which countries provide residence by investment and can it lead to citizenship by investment?

Passports with Most Destinations

There are about 20-different countries that are known for providing the best range of passport versatility as compared to others. These 20-passports below are not necessarily the best passports for US Citizens or Expatriates — especially if the country of the Passport turns out to be the country of residence.

Rather, these are essentially just the 20-passports that have the most available non-visa (or visa on arrival) destinations.

  1. Japan
  2. Singapore
  3. Germany
  4. South Korea
  5. Finland
  6. Italy
  7. Luxembourg
  8. Spain
  9. Austria
  10. Denmark
  11. France
  12. Ireland
  13. Netherlands
  14. Portugal
  15. Sweden
  16. Belgium
  17. New Zealand
  18. Norway
  19. Switzerland

Citizenship By Investment Passports

Golden Visa Programs can be broken down into two (2) main categories: Citizenship-by-Investment (CBI) and Residence-by-Investment (RBI). The different Golden Visa Programs vary based on cost and benefits attributed to the specific program. In general, obtaining Citizenship-by-Investment provides the most opportunity — as opposed to Residence-by-Investment (RBI). With citizenship comes more rights — including the ability to obtain a passport which is not available to someone with residence-status only.

Here are some of the most common citizenship by investment programs:

  1. Antigua and Barbuda
  2. Austria
  3. Dominica
  4. Grenada
  5. Malta
  6. Montenegro
  7. Kitts and Nevis
  8. Lucia
  9. Turkey

Residence By Investment Passports

With the Residence-by-Investment (RBI), a person does not become a citizen by way of the investment — but they have the right to become a resident of that country. Even without a passport, some countries issue certificates to allow travel to various countries Visa-Free or VOA (Visa-on-Arrival). After a person has expatriated from the United states, if they already have dual-citizenship — then obtaining Residence-by-Investment  in another country may provide the important benefit of versatile travel opportunities — without having to become a citizen — such as easy access to the Schengen Zone.

Here are the most common Residence by Investment:                                                   

  1. Australia
  2. Austria
  3. Canada
  4. Cyprus
  5. Greece
  6. Hong Kong
  7. Italy
  8. Jersey
  9. Latvia
  10. Malaysia
  11. Malta
  12. Monaco
  13. New Zealand
  14. Portugal
  15. Singapore
  16. Switzerland
  17. Thailand
  18. UK
  19. USA

Taxes, Passports & Travels are Entwined

In conclusion, when a US Citizen or Long-Term Lawful Permanent Resident relinquishes/renounces their US status, they will need at least one other passport. It is important to evaluate their overall tax situation in order to determine which passport they provide the best bang for the buck — realizing, that not all passports benefit everyone the same, and outcomes will vary based on categories and types of income along with transfers of wealth.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.

Contact our firm for assistance.

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