This spring, when New York announced plans to hike state taxes, making 8.97% the highest rate for the state and 12.62% the highest rate for those who live in New York City, Rush Limbaugh, the conservative talk show radio host, decided to leave New York. He loudly proclaimed he would not be back. Of course, Limbaugh is hardly the first taxpayer to desert New York City. Nor is he the only one to contemplate moving from one state or city to another to save money on taxes. Plenty of people think about it; plenty of people do it.

Like most financial advisors, you probably tell clients: "Don't let the tax tail wag the dog." Yet when tax rates go up in one place and down in another, what can you do? And when the federal administrations change and some of your clients talk about leaving the country altogether because they no longer believe in its values as expressed by the White House, what can you do? Perhaps you had clients who wanted to leave the country when George W. Bush got elected. Or maybe, in these early months of the Obama administration, when some Americans perceive the government as "anti-business" or "soaking the rich," a new group of clients talk about leaving.

I hear colleagues saying, "I'm getting out of here," or "I can't afford to live here anymore," or "Why can't I move to a country where I can enjoy a reasonably comfortable lifestyle?" Why, they want to know, should they continue to pay a larger and larger piece of the U.S. tax burden when they no longer agree with the way tax money is spent? To find out just what it means to leave the country, I talked with John Mattos, international tax partner in the Los Angeles office of PriceWaterhouseCoopers. It didn't take long for me to get the picture: Leaving one state for another is a citizen's right. Leaving the country removes a citizen's rights. He's simply no longer a citizen. And it's unwise to try to trick the Internal Revenue Service. "The U.S. government is continuing to lengthen and strengthen its claws to get all tax due," Mattos says. Don't bet against the government.

Betting against state governments is a better risk. Consider this: When Maryland couldn't balance its budget in 2008, the state tried to close the gap by going after the rich, according to a story in The Wall Street Journal. Maryland created a "millionaire tax bracket," increasing the top rate to 6.25%. The state-local rate could go as high as 9.45%. Governor Martin O'Malley expressed confidence that the rich were "willing and able" to pay their "fair share," according to the Journal. A year later, one-third of those willing and able millionaires had disappeared from the tax rolls. Whereas about 3,000 million-dollar income tax returns had been filed by the end of April 2008, by April of this year, there were only 2,000 and the state collected $100 million less in taxes, the Journal reported. If a client with a second home in a more tax-friendly state can simply change his residence, would you try to talk him out of saving several thousands of dollars?

Over that same year, April 2008 to April 2009, U.S. federal tax revenue plunged by 34%, according to a study released by the American Institute for Economic Research. During that period, 6 million people lost their jobs. "These are staggering numbers," says Kerry Lynch, the author of the report. And they will mean more taxes for those left standing, which provokes fear among the wealthy. And every time the tax rules actually change, some taxpayers want to give up their U.S. citizenship, Mattos says.

But before one of your clients writes to the State Department to renounce his citizenship, talk it over with him. You probably already know the rules. People born in the U.S. are taxed on world income wherever they earn it. "Over the years, the rules have become more and more complex," Mattos says. A non-resident alien is taxed by the U.S. only if he does business in the U.S. and earns income of more than $3,000 or receives passive income such as dividends on American stock.

To make it more tempting for those Americans thinking about leaving, some countries, like Switzerland, offer special tax arrangements to attract high-worth individuals. But if you expatriate, it's much more difficult to use the U.S. court system; if you get in trouble in another country, you can't go to the U.S. embassy. And Congress is not going to let you just give up your citizenship and leave. You must pay. You must write a letter to the U.S. State Department renouncing your U.S. citizenship and a letter to the U.S. Citizenship and Immigration Services. Then the IRS issues a letter ruling and announces that you are no longer a U.S. citizen. "It can be a pretty public affair," Mattos says. The 50 U.S. states are not bound by the U.S. rules. If your client keeps real estate in California, that state can tax him.

The IRS takes its share of the expatriate's assets before he leaves. The assets are treated as if the individual had sold all of them the day before expatriating. A 2008 law provided for a $600,000 exemption before calculating taxes. That number is indexed for inflation; for 2009, it is $626,000. The value of all the assets the about-to-be expatriate owns, minus the $626,000 exemption, is taxed at up to 35% for ordinary income and 15% for long-term capital gains for the 2009 tax year.

But let's suppose your client is in a position where he's not worth much today but he plans to break into the Forbes 400 list with a software program he's working on. Or what if your client owned stock in a company that looks grim over the short term but that has glorious potential over the next ten years? Don't forget, the U.S. government can look back at this person's returns for three years. But if your client expects to become a billionaire sometime after that, he could be moving out his human capital-or investment capital-into a place where he would pay less tax on it in future years.

Your client faces special tests once he is an expatriate. For example, if he earns a certain amount of income here or if he is physically present in the U.S. more than a specified number of days, he will pay U.S. tax on his worldwide income. The specifics are arcane, but if he spends 31 days in the U.S. in a year, he should be looking over his shoulder. Other limits take the U.S. residency days over three years and multiply them by X to find out if he is in compliance. So there's no easy way to answer this, but it is a significant issue that should be fully discussed with your client.

First « 1 2 » Next