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SOVEREIGN MAN

Does renoucing US citizenship get me out of my tax obligations?

February 24, 2012
Santiago, Chile

I want to start off today’s letter by thanking the 120+ folks who’ve made the journey down to Chile over the past two weekends to break bread on the farm. Last weekend’s event was a real delight, and I’m looking forward to tonight’s festivities with the new group.

It’s a pleasure to spend time around people with a similar world view, and it was amazing to see dozens of complete strangers forming fast friendships in such a pleasant setting.

On to this week’s questions.

First, Art asks, “Simon, we know the index fund ‘buy and hold’ strategy of most financial advisers is for the birds. What kind of investment(s) would you recommend for someone without much time to manage their portfolio, but wants good long-term investments through an easily accessible brokerage account?”

The traditional mantra of ‘buy and hold US blue chip stocks’ is absolutely for the birds. Turkeys, to be exact. Adjusted for inflation, the S&P 500 is down 2.41% in the ten years since February 24, 2002. Throwing in the average index fund’s fees would have soured that loss even more. Pitiful.

[Editor's note: for math wonks, the St. Louis fed has tracked the compounded inflation rate since February 2002 at 27.48%; the S&P 500 closed at 1090 on Friday, February 22, 2002.]

The fact is that right now, markets are completely fractured. The price discovery mechanism has been buried under bailout rumors and policy innuendo. Fundamentals really don’t matter anymore, it’s just a question of politics and money supply.

To make things worse, we live in a zero-yield world where risk quantification is deeply flawed. The largest debtor in the history of the world, which is on a one-way road to going debt supernova, is considered ‘risk free’. This is completely idiotic, and it has created severe structural issues in the market.

In my mind, nothing beats investing in private businesses that provide honest, tangible value to the market.  Such deals are much more exciting and easier to understand than divining what toxic assets Citigroup has on its books. Plus, as a director of an operating business, you can generally influence many risks yourself.

Managed trading accounts and trading services may also be reasonable options. Our partner Tim Staermose’s now sold-out Fourth Pillar strategy is one example; it uses takeover arbitrage in Australia to generate consistent double digit returns devoid of the volatility that typifies capital markets.

Well-managed productive land in investment-grade scale also strikes me as a very sound option, especially in an environment of continued monetary debasement. This is what we’ve done in Chile– we’re growing a LOT of food… and if the investment thesis isn’t 100% correct, there’s still a lot of personal benefit.

There’s also the option of applying the ‘buy and hold’ strategy to certain frontier markets– accumulating a basket of select, high quality equities in a place like Mongolia where you can walk away for five to ten years while the economy grows like a weed.

Next, Frank asks, “Simon, year in, year out, I seem to be in trouble with the IRS. Last year I took the step of obtaining a second passport from St. Kitts, and I’m seriously considering walking away from my US citizenship in the hopes that they’ll leave me alone. Is this a reasonable supposition?”

Yes and no. The day you renounce (or relinquish) your US citizenship, your future obligations to Uncle Sam are gone for good. You can open up any bank or brokerage account you want without worrying about filing an FBAR, and you can earn as much non-US income as you like without ever filing a 1040 ever again.This does not, however, get you out of existing obligations. If they’re coming after you for unpaid taxes from two years ago, you’re still on the hook, even if you manage to renounce your citizenship.

Renunciation is a move you make with an eye to the future. It will not fix the past.

Next, Barry asks, “Simon- I read your note about Singapore citizenship; isn’t it true that the government of Singapore does not allow dual nationality?”

That’s correct; individuals who become naturalized Singaporeans are technically obliged to relinquish their other passports. However, there is no real enforcement mechanism for this… and I have several naturalized Singaporean friends who simply forgot and/or haven’t gotten around to relinquishing yet.

Last, Jeff C. asks, “Simon, when I read stuff like this, I have a hard time thinking I won’t be targeted by the US government for having a foreign bank account, etc.  I’d love to get your thoughts on that potential risk.”

History shows us that when governments decline and fail, they cannibalize the citizenry and shake every last nickel they can from the sheeple. It doesn’t matter who you are– a retired school teacher, a small business owner, a struggling single mother– everyone becomes a target.

Eveyone ultimately has a choice. We can either choose to be a target and be safely diversified abroad, or we can choose to be a target and have all of our assets in one basket for easy pickings. We’ll all be targets regardless.


About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • disqus_TLcMqwnySr

    Yes, as with emerging/frontier markets, a `buy and hold` strategy can be completely valid – the right tool for the right job. The difficult part is determining what’s worthwhile to hold onto for the long-term.

    For example, the Tocqueville Gold fund (TGLDX) is geared toward and diversified among the strongest commodity currency complex in addition to an annual dividend.

    Then there are the incredibly risky, yet unbelievably strong potentials such as Bitcoin…

    As for the sheeple: http://xkcd.com/1013/

  • LocalHero

    Only a sucker would put a nickel into the rigged financial system (especially in the US) and I get much better returns betting on sports than anything Simon has mentioned. If you use a good service that you’ve done “due diligence” on, you can make several hundred to several thousand a week. Over just the last 14 days I’m up $2200 starting with a $5000 bank and I only bet $100-200 a game (90% of them at $100). I place my bets and take the rest of the day off.

  • Dmckeegan

    Simon, Thanks for all the great content you put out there!  I just wanted to expand on this post a little bit as it worse then most people think! As part of the Heroes Earnings Assistance and Relief Tax Act of 2008 Congress unanimously voted to add an “exit tax” to any US citizen renouncing their citizenship.  If you have a net worth greater than $2m, average tax liability over $145k for 5 years or you have not been filing you will get caught in this. Basically the IRS will consider all your assets sold on the day before you renounce and charge you tax on the while lot! Now you do get an exemption of $651k and its 2x that if you are MFJ, but it can still be a big chunk of tax!

    Keep up the great work.

    David
    http://www.greenbacktaxservices.com 

  • Hatchk01

    Simon,

    I’m so happy to have found your website. I’d love to become a SMC subscriber, but every purchase attempt I’ve made (five in total at this point) has given me a message like this:

    Important Message
    There was a slight problem with your order.
    Please fix the areas indicated below:
    Error-> Payment Failed: Card not charged: Error 2217Error-> Card not charged: Error 2217

    I’ve sent emails to clients@sovereignman.com notifying them of the problem but have yet to hear back. Please help me resolve this so I can begin taking advantage of SMC’s tremendous content. Thanks and keep up the good work!

  • http://www.wanderingtrader.com WanderingTrader

    Hey Simon I don’t know if you have heard about Wyoming passing a doomsday bill but I think it would be a very interesting topic for the site as some states are “getting the message”.  You can see the news report below:

    http://trib.com/news/state-and-regional/govt-and-politics/wyoming-house-advances-doomsday-bill/article_af6e1b2b-0ca4-553f-85e9-92c0f58c00bd.html 

  • http://www.77successtraits.com Mark Foo

    Hi Simon,

    Although you may be right that, as a naturalized Singaporean, there is no real enforcement mechanism to ensure you relinquish your other passports.

    However, you’re NOT likely to be able to keep the dual citizenship forever. If the Singapore government finds out you’re still holding on to other passports, they may come down hard on you.

    There’s an unofficial saying in Singapore:

    “Our government is the biggest mafia in the country.”

    So you wouldn’t want to screw around with them.

    Cheers~

    Mark

  • Crusader70

    I believe that under a new law passed during the last Bush administration, you must pay taxes on all your assets when you renounce (even the word is loaded) your U.S. citizenship, ‘as if you had sold them’. That being the case, I suspect most Americans going this route actually do sell most of their assets in advance.

  • NYDB

    Honestly, if I were a Singapore citizen, I would not *need* any other citizenship.  It would be “goodbye USA” and “good riddance IRS”…

  • Charles Yeargan

    What are the mechanics of how a member of Sovereign Man Investing can acquite a basket of equities in Mongolia?

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