The Wall Street Journal explains why wealthy songwriter Denise Rich gave up U.S. citizenship:
In 2011, nearly 1,800 people renounced their U.S. citizenship or residency, a sixfold increase from 2008. In May, a furor erupted after it was revealed that Facebook co-founder Eduardo Saverin had renounced his citizenship ahead of Facebook’s public offering, saving himself millions in taxes.
Experts say the increase in expatriations comes in part because of the Internal Revenue Service’s crackdown on undeclared and untaxed foreign holdings of U.S. taxpayers. Unlike many countries, the U.S. taxes citizens and residents on their worldwide income, but the rules were loosely enforced for many years. That changed after the terrorist attacks on Sept. 11, 2001, and, separately, evidence that giant Swiss bank UBS and other offshore providers were encouraging U.S. taxpayers to hide assets abroad.
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The exodus from the U.S. may also be intensifying because of the prospect of higher tax rates next year. Even if Congress extends current tax rates for a year or two, a new 3.8% tax on investment income for most couples with adjusted gross income above $250,000 ($200,000 for singles) will take effect in order to help pay for the heath-care overhaul.
In order to leave in good standing, Rich will owe exit taxes. U.S. citizens and residents who expatriate are treated as though they sold all their property the day before they renounce, even if they will continue to own it and pay property or other federal, state or local taxes. Capital gains are taxed at the current top rate of 15%, and some assets (such as individual retirement accounts) are subject to tax at ordinary income rates as high as 35%.
Expatriates-to-be also have to show proof of tax compliance for five years, and may have trouble re-entering the U.S. without a visa.