There are eight criteria governments consider to determine your personal tax status. The most important of these are citizenship, residence, and domicile. In addition, your marital status, source of income, location of assets, timing, and status of beneficiaries may impact your tax status.
Citizenship, the status of being a citizen of a specific nation state, signifies a person’s legal status and carries with it numerous consequences. Among associated political rights are the right to vote, to hold public office, to own land and the right to travel with your country’s official passport and protection.
Your actual residence, the place where you live, has a major impact on whether and how much your national government will tax you and your assets. The situation is complex because there is no uniform international legal definition of “residence.” Most countries consider a person a resident for tax purposes if, during any tax year, the person spends more than a specified period of time there. In some countries, the period is 182 days (approximately six months) annually. In others, it is as little as three months.
Domicile, is an estate tax and probate concept that is determined by an individual’s expressed or implied intentions. Your domicile is your intended ultimate home, the place to which you eventually intend to return, regardless of where else you may live, or for how long you stay away. Domicile can be different from your country of actual residence, or it can be the same. We begin our lives with a domicile of origin acquired at birth. It is possible, but not easy, to change this to a domicile of choice.
Domicile issues arise when one leaves a high tax country but fails to establish a permanent home elsewhere. Failing the creation of a new domicile of choice, a person remains domiciled in his home country for estate tax and some other legal purposes. Such a conflict can have disastrous tax consequences for one’s heirs in a contest with the tax authorities of your domicile of origin.
The United States uses all of these eight criteria as a basis to impose its federal income, gift and estate taxes. U.S. permanent resident aliens and U.S. citizens, by virtue of that status alone, are taxed on all their worldwide income wherever it is earned and wherever they may live.
Many countries exempt their citizens from taxes while they live abroad, although an increasing number are beginning to adopt the “no escape” U.S. tax view. Among those nations named above, the U.S. is the one of the few countries that makes a serious effort to collect taxes from its citizens living in other nations. Not content with that, the U.S. also tries to collect taxes from some of its former citizens, claiming the right to do so for a period of up to ten years after they formally relinquish citizenship.
As you may have concluded by now, an American cannot become a “tax exile” so long as he or she remains a U.S. citizen. And if you decide to relinquish U.S. citizenship, you first must acquire another nationality as well as a passport on which to travel. The U.S. State Department concedes an American citizen’s right to have dual nationality and to acquire that other nationality voluntarily without automatically losing American citizenship. But if that is your plan, the first essential step is to acquire another nationality.
One possible answer to heavy government taxation is very careful tax planning well in advance of acquiring second citizenship. But acquiring a second citizenship is the key to becoming what some call a “taxpatriate” – meaning an expatriate who rearranges his life in such a way as to avoid all home country taxes and, in fact, almost all taxes anywhere. This is what Dr. Marshall Langer calls “the ultimate estate plan.”
Escaping U.S. Taxes
As we have seen, U.S. citizens cannot simply escape U.S. tax liability by establishing a new residence abroad.
U.S. citizens living and working offshore do qualify for a tax break known as the “foreign earned income exclusion.” This totally exempts $76,000 of a U.S. citizen’s annual income from all income taxes. That amount will increase by $2,000 annually until it reaches $80,000 in 2002.
Unlike citizens of the UK or Canada, to become an effective tax exile and avoid all U.S. taxes, a U.S. citizen must not only change residence to another country, but also acquire an alternative, second citizenship from that or another country, then formally relinquish U.S. citizenship as well. Obtaining dual nationality does give a U.S. citizen a second passport and all the important personal security and benefits that can go with it. But under American law dual national U.S. citizens remain liable for U.S. taxes.
Proper legal advice on the selection of a new citizenship is critical. Whether the new citizenship is acquired through ancestry, naturalization, or purchase of an economic citizenship, the person must make sure that their new, second citizenship gives them the freedom they desire. That means the ability to travel to all their favorite countries, including the United States, without requiring issuance of official visas.
Escaping United Kingdom Taxes
Retaining British citizenship does not in and of itself affect one’s UK tax status. Actual residence does. To escape UK income and capital gains tax a British citizen must not be present physically within the UK for more than 182 days per year. One must also avoid regular visits exceeding 90 days for the first three years of absence and, if questioned, show that any UK visits are purely for temporary purposes. One must also have a permanent home abroad or the ability to establish one and be employed, or self employed, abroad. British citizens who leave the United Kingdom can become effective tax exiles while retaining British nationality. Acquiring a second passport will be advantageous for other reasons, but it is not a necessary step to reduce UK taxes.
Escaping Canadian Taxes
Similarly, retaining Canadian citizenship per se does not impact tax liability for citizens who abandon residence there. For Canadians, establishing a foreign residence is enough to secure an advantageous tax position, however there is a capital gains tax imposed on certain assets upon departure. This tax is calculated as if a sale of a person’s solely owned assets has occurred, wherever in the world they may be. However, there are certain exemptions from this tax and proper planning can mitigate its impact.
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