Why Collecting Passports is Bad For Your Finances, Example
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Collecting Passports is Hazardous to Your Taxes and Finances
With everything that’s been going on in the world over the past few years, it makes perfect sense that many taxpayers will seek out a Plan B — just in case their plan ‘A’ goes awry. Most of the time, a Plan B will involve obtaining a second citizenship or possibly residency in a foreign country — which may be acquired by way of a golden visa. But, to obtain a passport, a taxpayer must become a citizen of a foreign country, which is different than just obtaining residency. This is where the problem arises for many taxpayers who end up down the wrong rabbit hole online and are goaded into spending tens of hundreds of thousands of dollars for services to purchase multiple citizenships by online shysters and other internet marketers who deceive taxpayers into believing that having multiple citizenships and planting flags in different countries will benefit them, when in fact most of the time it does little more than drain their pockets. Let’s look at a few reasons why collecting passports is not the best idea, followed by a real-world example of what can happen when it all goes wrong.
First, U.S. Has a Worldwide Income Tax (CBT) Tax System
The first thing to keep in mind is that, unlike other countries, the United States follows a worldwide income tax model for individuals. That means that U.S. citizens, lawful permanent residents, and foreign nationals who meet the substantial presence test are subject to U.S. taxes on their worldwide income. Therefore, just obtaining a second, third, or fourth citizenship/passport in and of itself will do nothing to reduce your U.S. tax liability. In fact, it may significantly increase your overall tax liability since many foreign countries have other types of taxes and licensing fees that are not creditable on Form 1116.
One Extra Strong Passport Should Be Fine
The reason why a taxpayer would obtain a second passport is usually either because they are going to renounce their US citizenship or they are seeking to travel across the globe, and the U.S. passport may not provide the travel rights and opportunities that they need such as unlimited access to the Schengen area.
If a taxpayer is either considering expatriating or traveling beyond the strength of their U.S. passport then they should carefully evaluate all of the different passports to determine which one provides the best bang for the buck.
Why Not Multiple Passports?
For taxpayers who grew up in the United States and are U.S. citizens, they are familiar with the U.S. tax code and the different types of taxes that the IRS government levies upon. For most Americans, the primary tax they will pay is income tax on their active and passive income. In other countries, citizens of those countries may become subject to other types of taxes even if they do not reside in that country’s borders for the simple fact that they are citizens of that country — especially if they have assets in that country.
For example, some countries levy a VAT tax. Other countries may also have various wealth taxes which are different than U.S. estate taxes and do not get credited on a U.S. tax return. Moreover, when a person is a citizen of a country and has assets or investments in that country there may be specific limitations on how those assets would be left to a United States beneficiary. In other words, there may be a specific required distribution schedule that is not in line with what the taxpayer intended.
An Example of How It Can All Go Bad
David is a U.S. citizen. He is concerned that his soon-to-be ex-wife may be coming after him for certain assets and wants to shield them from the divorce settlement. David is also concerned that a former business partner may sue him. Making matters worse, Davis is also behind on his taxes and is worried the Internal Revenue Service may come after him as well. Therefore, David creates an offshore asset protection trust (OAPT), in an offshore tax haven country and transfers assets into that trust. He was also led to believe the more passports, the better, so he bought three passports and two Golden Visas (Residency) to become the ultimate ‘nomad.’
Fast-forward 3 years later and it turns out David was just overly concerned. He had a couple of good years and was able to pay off his taxes. He also agreed with his ex-spouse to split their assets and he settled the matter with his former business partner.
The problem now though is that David has seven figures worth of assets and investments in an offshore tax haven, in an irrevocable trust. Since the trust is irrevocable David cannot just cancel the trust. Moreover, the trust rules within that country have changed and it is now very difficult if not impossible for David to exchange assets out of the trusts (aka decanting the trust). Finally, David did not realize that he pays a 3% value of the trust each year as fees for the local trustee to manage the trust, and the trust requires at least one local trustee.
As a result, the offshore trust that David thought was being used to protect him is now being used to drain and deplete his assets and net worth.
Finally, one of the countries where David is now a resident significantly increased the annual fees for maintaining the Golden Visa (fees are mandatory) and one of the citizenship countries increased their wealth tax on citizens with a high net worth.
Golding & Golding: International Tax Lawyers Worldwide
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.
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