Expatriation: Breaking up can be hard

An increasing number of Americans living abroad, including those living in Canada, are choosing to give up their U.S. citizenship in order to escape the burden of their U.S. tax-filing obligations.

Through the first six months of this year, 1,809 Americans renounced their U.S. citizenship, according to U.S. government figures. That compares with 932 so-called “expatriations” in all of 2012.

“Every single American client asks us about expatriation,” says David Altro, managing partner with Altro Levy LLP, a law firm in Montreal that specializes in cross-border tax advice.

The spike in expatriations appears to stem in part from the anticipated arrival of the new U.S. Foreign Account Tax Compliance Act. This legislation will compel financial services firms around the world to report to the U.S. government on the accounts held by their American clients starting next year.

Expatriation is not an easy or painless process, however. It involves, among other steps, making a formal oath of the intention to renounce citizenship at a U.S. consulate or embassy, filing the past five years of tax returns and other tax reporting, and paying any taxes and penalties owing.

For wealthy expatriates, there also may be a hefty departure tax, as well as other taxes involved with renouncing citizenship.

Not only is expatriation a difficult undertaking, Altro says, for many Americans, it simply represents a step too far in severing the last tie to home.

“When it comes down to it,” he says, ” there’s a patriotic tug at the heart, and they don’t [renounce their U.S. citizenship], which is totally understandable.”