(Money Watch) Ever wish you could live somewhere with a lower personal income tax? You're not alone. An increasing number of people are renouncing their U.S. citizenship and a fair number seem to be doing it for tax reasons.
According to Reuters, a record 1,800 people either renounced their U.S. citizenship or returned their Green Cards last year. That's the most since the Internal Revenue Service began tracking this number in 1998. The total is up 400 from 2010, almost eight times the total for 2008, and more than 2007, 2008 and 2009 combined.
This can be an especially attractive option for the estimated 6.3 million U.S. citizens living abroad. That is because the U.S. is one of the few nations to tax its citizens on income they earn while living in another country. If you're already living somewhere with a lower tax rate, it may very well make fiscal sense to change passports.
Compared to other nations the U.S. tax rate isn't actually all that bad. The median U.S. income is around $50,000 and people earning that fall into the 25 percent tax bracket. The highest tax bracket, which applies to those earning more than $373,650, is 35 percent.
According to the Organization for Economic Co-operation and Development, this is a better rate than you will get in the most of Europe, Japan, Australia, New Zealand and Israel. (These are based on 2010 rates and doesn't include most of South or Central America, India, China, Africa, as well as most of the Middle East or Asia.) The only nations with lower rates on the OECD list: Canada, Mexico, Turkey, Spain, Greece, Luxembourg, Chile, Finland and Norway.
Another thing to keep in mind: You may have to pay a hefty exit tax before you are allowed to leave. If you made an average of $145,000 over the previous five years or have a net worth of more than $2 million or haven't paid all your taxes for the previous five years, look out. Then the IRS is going to have you hold a theoretical yard sale. It will calculate how much you would have earned if you had sold all your assets on the day before expatriation. You have to pay tax on the theoretical profit which that sale would have given you. There is some good news: The first $627,000 of that (as of 2010) is excluded, so only the net gain after the first $627,000 is taxed.
Still want to go?