It’s not uncommon for US citizenship to pose difficulties for US citizens living abroad, particularly when they’ve lived abroad long term. While US citizenship grants certain privileges, such as the right to vote in federal elections and a US passport, it also carries with it certain burdensome obligations.
Among the most pressing concerns for Americans living in a foreign country are the tax, reporting, and financial implications. In some cases, these obligations may be so cumbersome for Americans abroad (especially those who don’t plan on returning to the US) that they choose to renounce their citizenship.
While the sticker price of renouncing US citizenship is on track to significantly decrease soon, there are other, more nuanced costs associated with surrendering citizenship that will come up throughout the process.
Read our guide below to learn more about why Americans renounce their US citizenship, what the process to do so involves, how much it currently costs, and more.
Why a US taxpayer may decide to renounce US citizenship
There are many reasons that a US taxpayer living abroad may choose to renounce their US citizenship, including:
The citizenship-based taxation system
The United States is one of just two countries in the world to tax its citizens based on their global income no matter which country they live in (the other being Eritrea). As long as Americans meet the minimum income filing thresholds, they must file a federal US tax return and pay US income taxes, even if they live abroad.
Often, Americans living abroad must also pay income taxes in their country of residence, which can mean the same income is subject to taxation by two different countries.
Important to know:
If you are subject to taxation by the US and your country of residence, that does not necessarily mean that you will have to pay taxes twice on the same income. The IRS offers several relief provisions for US expats in these situations.
That said, while there are tax strategies US expats can leverage to reduce (or even eliminate) the risk of double taxation, there may be situations in which they aren’t able to avoid it completely. These cases typically occur in the context of high-net-worth individuals.
What’s more, being a tax resident in one country and subject to citizenship-based taxation by the US makes the process of filing your taxes complicated and time-consuming. That means twice as many complicated taxation rules to navigate and sometimes, filing two different tax returns.
Additional reporting requirements
Americans abroad may also be subject to additional reporting obligations compared to their stateside counterparts. Those with more than $10,000 across foreign accounts, for example, must file a Foreign Bank Account Report (FBAR). Likewise, those with more than $200,000 in foreign assets on the last day of the tax year — or more than $300,000 at any point during the tax year — must file Form 8938. The penalties for failing to file these reports can be steep, even if it was accidental. And since the 2010 passage of the Foreign Account Tax Compliance Act (FATCA), it’s easier than ever for Uncle Sam to see which US expats have outstanding reports to file and hold them accountable.
Although in many cases it’s possible to avoid paying the imposed IRS penalties with the help of a US expat tax expert, the sticker shock is very real and confers a great amount of stress on the US expat taxpayer.
The US government tends to treat tax foreign investments more harshly than US-based ones. For example, most foreign mutual funds are classified as Passive Foreign Investment Companies (PFICs), which are taxed at a high rate compared to domestic mutual funds. The reach of PFIC reporting includes virtually any type of foreign-based pooled investment fund, including investment trusts, exchange-traded funds (ETFs), foreign corporations, and even insurance plans or pension schemes.
And finally, some Americans abroad may renounce their citizenship due to political/philosophical disagreements with the US, or because they want to become citizens of another country that does not permit dual nationality.
Who renounces US citizenship?
For US citizens who have moved abroad and don’t intend to come back (such as dual nationals or Accidental Americans) the reasons above may be motivation enough for them to renounce their US citizenship.
Some well-known Americans have given up their citizenship, including actor Jet Li, co-founder of Facebook Eduardo Savarin, and musical legend Tina Turner, who recently passed away after living in (and obtaining citizenship in) Switzerland for 30 years.1
How much does it cost to renounce US citizenship in 2023?
To renounce your citizenship, you must have been tax compliant for five years and subsequently pay any outstanding tax bills that you may owe.
Additionally, you must prove by the following June 15th that you’re compliant for the five years before renunciation. So, on the date of the appointment, you may be behind, but you have until the following June 15th to meet the threshold to be deemed in compliance. If you’d like to simulate the renunciation process, connect with a US expat tax expert.
Those hoping to renounce their US citizenship must also pay a non-refundable renunciation fee of $2,350 for administrative processing.2
The US is on course to decrease that cost significantly, to just $450. (3)
Certain expats, classified as “covered expatriates,” are also subject to an additional expatriation tax, or exit tax. Generally, a covered expatriate is somebody who either:
- Has had an average income tax of more than $178,000 over the past five years before their renunciation date,4 OR
- Owns more than $2 million in worldwide assets, OR
- Fails to certify that they have been compliant with their tax returns over the past five years.
Most often, covered expatriates subject to the exit tax are taxed on the fair market value of their assets at a long-term capital gains rate of 23.8% (excluding the first $767,000).5 The exit tax, in other words, is imposed as if you’d sold all of your worldwide assets on the last day that you held US citizenship. There are exceptions to this rule, but it can be difficult to predict which assets will classify as such, and how they will be taxed.
Lesser-known costs of the renunciation of US citizenship
Beyond the financial costs of renouncing US citizenship, there are certain rights and privileges you lose as well. For example, if you renounce your citizenship, you will no longer be able to:
- Freely enter and exit the US without another valid visa (or certain foreign passports)
- Live and work in the US without another valid visa
- Vote in federal elections
- Pass US citizenship onto your children
- Receive assistance from the US government (e.g. embassies, consulates) if something happens to you abroad
What happens when you renounce your citizenship
Deciding to renounce your US citizenship is a big decision. Whether or not it’s the right move for you is very personal and highly dependent on your unique circumstances. Before you decide to go through with renouncing your citizenship, you’ll likely want to talk to an expat tax professional as well as an immigration attorney.
If you do decide to renounce your citizenship, however, you’ll generally need to:
- Fulfill all of the requirements and understand all of the consequences of renunciation
- Gather all of the required documents and schedule an in-person appointment with your nearest US embassy or consulate for instructions
- Attend the appointment to submit the documents and fees as well as take the oath of renunciation
- Receive the “Certificate of Loss of Nationality” after your renunciation has been accepted
- File your final US tax return with the IRS by June 15th in the year following renunciation, certifying to the IRS that you’re all caught up on US tax filing for the prior 5 years
At that point, you will be free of US tax obligations moving forward. However, as mentioned above, you will no longer receive the rights and benefits of being a US citizen.