The recent court case involving U.S. clients of UBS who held bank accounts in Switzerland also put a damper on using that country as a tax haven for U.S. income.
"The IRS was trying to do this for many, many years, but they couldn't get cooperation from foreign countries, and they couldn't get cooperation from Congress. There was just a feeling that it was too harsh to make people tell you all about all their accounts outside the U.S.," Gluckman says.
That all changed when terrorists began using the international banking system to move money in and out of the U.S. banking system.
There were always rules about reporting foreign bank accounts, and there were even criminal penalties, but there was little enforcement, Gluckman says. Now there are strict penalties if you don't file the forms. The IRS has offered secret account holders amnesty periods to turn over their information, and said publicly it will go after the people who didn't come forward, Gluckman says.
The irony is that tax rates abroad aren't necessarily lower. Tax rates in the Netherlands, the United Kingdom, Poland, France, China and Japan, for instance, can be significantly higher than they are in the U.S. Steven Elliott, tax director at Schwartz & Co. LLP, in Bellmore, N.Y., says most of the people he's seen expatriate have done so for a variety of reasons-not just to avoid taxes.
"In most cases, taxes are still going to be part of the mix, but like anything else, it's a global thought process. People look at other countries' health system, entertainment, sports, theater-whatever is important to that person," Elliott says.
And while some people living and working abroad complain about still having to pay taxes in the U.S. on their foreign-earned income, they are allowed certain credits and exclusions that help alleviate double taxation. But one must spend a certain amount of time overseas to be eligible. An individual working in Ireland or the U.K., for instance, needs to be out of the country 330 out of 365 days to qualify for the maximum annual earned income exclusion of $91,000. They can also deduct from their U.S. tax bill a certain amount for living expenses and housing allowances overseas, as well as a foreign tax credit, meaning they deduct the amount of taxes they paid overseas.
"When you go to pay your taxes in another country, it offsets your taxes here, dollar for dollar," Elliott says.