The dilemma

TheAmerican | In Italia

Published August 25, 2011

Among the first cases I was involved with after moving to Italy was an international kidnapping. A judge in Santa Monica, California had awarded an American mother custody of her son in a divorce matter. The boy's Italian father traveled to California and brought the child back with him to Italy. The father was convinced a previous family court ruling in Rome awarding him temporary custody gave him preferential rights.
YOU CAN'T LEAVE HOME WITHOUT IT.

YOU CAN'T LEAVE HOME WITHOUT IT.

This is not a rare event and such misunderstandings occur internationally in both directions.

My involvement in the case began with urgent calls on a Monday from the U.S. Embassy. We were immediately put in touch with Interpol, a deputy from the Santa Monica Police Department, and the mother of the boy in California. Everyone wanted the child returned to the United States within a week and we were told we would be provided with any necessary assistance.

Since court decisions were already in place, the matter could be brought before Rome's Court of Minors in an immediate and clearly documented way. We outlined the necessary documents and their format to the Santa Monica police official. Within two days all the paperwork arrived through diplomatic channels. The mother, her parents, and the deputy landed in Rome Thursday. After court hearings that day and the next, with the father, son and their lawyer all present, the Court of Minors ordered the father to release the boy back to his mother for his return to California.

I was stunned at how swiftly the U.S. diplomatic machinery could work on behalf of a citizen when it decided to intervene. We've all seen this kind of action (and inaction) over the years, but my awe remains intact. A U.S. passport is one of the most valuable documents in the world. It provides a direct link to a country founded on fiercely protected basic freedoms.

Lately, though, the umbilical cord tethering global U.S. citizens with their country has frayed or worn away completely. In recent years, the relinquishing of U.S. citizenship has grown annually. Motives vary, but the increasing burdens the United States is placing on overseas residents in the areas of taxation and banking certainly hasn't helped.

The U.S. is the only industrialized country not only to tax its citizens on their worldwide income during their lifetime but also to tax their worldwide estates upon their death, regardless of their residency status. Most other countries, including Italy, tie taxation to residency.

For American citizens who live in Italy and receive income from any source, this means filing annual income tax returns in both countries. The U.S. also requires annual reporting by citizens and permanent residents of any foreign bank interests and of investment accounts whose aggregate value exceeds $10,000 at any time during the year.

1927 U.S. PASSPORT.

1927 U.S. PASSPORT.

But it's U.S. estate tax that drives many citizens to the brink or beyond. The worldwide estate of a U.S. citizen is subject to U.S. estate taxes if the market value of the estate is higher than the $5 million exemption ceiling. That may seem like lot of money to many, but it's not to some. The full impact of the estate tax laws is felt most profoundly by American citizens who have lived and worked overseas — some their entire lives — and have close ties to the country in which they reside.

With the current exemption ceiling set to expire on Dec. 31, 2012, the future remains uncertain. No one knows just where U.S. legislators will set the ceiling next. This has led an increasing number of clients to look into expatriation as a potential option.

On the face of it, renouncing U.S. citizenship isn't complicated. You must appear before a U.S. consular or diplomatic officer and sign an oath of renunciation.

But turning your back on the IRS is another matter. Your U.S. tax obligations remain in effect up to the date of your expatriation. If you're a so-called "covered expatriate" — someone whose average annual net income for the five tax years prior to the date of your expatriation exceeds $145,000 or whose net worth is $2 million or higher at the expatriation date — you are subject to an "exit tax."

The "exit tax" is calculated on hypothetical unrealized net capital gain, based on the assessed the value of your property assuming everything you own was sold at fair market value on the day before your expatriation date.

When you renounce citizenship, you also lose the right to live and work in the United States, vote in U.S. elections, and to enter the U.S. to remain there indefinitely. You lose the protection afforded to U.S. citizens overseas, such as those afforded to the boy in the kidnapping case. Renunciation of U.S. citizenship is final and irrevocable. The cord is cut for the remainder of your lifetime.

The history of U.S. legislation on citizenship has always been weighted toward penalizing those who choose to expatriate, and current law is no exception. While tax realities may be making the decision somewhat easier, parting with your U.S. passport should not be taken lightly.