If you are a U.S. resident or citizen, one way to reduce taxes is to permanently give up your citizenship and residency. Before choosing this route, you need to fully grasp the implications: The United States frowns on those expatriating for tax purposes by making it nearly impossible to return to the United States. This law has been largely unenforced, but it exists nevertheless. In addition, you are still liable for tax for ten years after expatriating on all income originating from the United States if you give up your residence or citizenship for tax reasons. If you’re thinking that you could just state that you did not expatriate for tax reasons, it’s not that easy. Tax reasons simply apply if you had a net worth of $2 million or more since 2004, or if your average annual tax over three years was $124,000 beginning in 2004. The amounts are indexed for inflation for years starting in 2004 and thereafter. By expatriating, however, your future income earned outside the United States will not be subject to U.S. taxes. How much of an advantage that equals is for you to decide. And regardless of your net worth or your average taxes, you still have some tax reporting to do after expatriation.
In actuality, few people choose to give up their U.S. residency or citizenship, and those who do, do so for nontax reasons, such as returning to their country of birth or family ancestry. If you do choose to give up your U.S. citizenship or residence status, make sure that you have first made arrangements to acquire citizenship elsewhere and obtain a passport. And, if possible, get a passport from a country that bases its income tax system on residence rather than citizenship. For U.S. citizens, Canada is one of the more attractive countries for an alternate citizenship.