What Expats Who Want to Renounce Their US Citizenship Need to Know

expat renouncing us citizenship

The numbers of American expats renouncing their US citizenship has risen exponentially over the last few years. Before 2008, typically just a few hundred Americans a year renounced their citizenship, whereas in 2016 the figure exceeded 5000 for the first time.

The reason why the number of renouncers is rising so fast is American’s citizenship based taxation system.

The US is almost unique in taxing its citizens if they live abroad. Even though there are exemptions in place to reduce expats’ US tax liability, they still have to file a US tax return to claim them Furthermore, many expats also have to report their foreign bank and investment accounts (and possibly all their foreign assets) by filing an FBAR (Foreign Bank Account Report).

Many Americans who have settled abroad permanently resent the cost and hassle of their US filing obligations, and also the sense of intrusion and over-reach by the US government (around 200,000 foreign banks are currently reporting their US account holders to the US government, so the IRS knows exactly which expats should be filing).

To avoid the administrative burden of reporting their American account holders to the US government, some foreign banks have refused to provide services to Americans at all.

So if you are an expat thinking about renouncing your US citizenship, what do you need to know?

The Process

Once upon a time, renouncing US citizenship was inexpensive and straightforward. Not any more!

First, you must be a citizen of another country, so that you aren’t left stateless.

Before you can renounce your US citizenship, you also have to be up to date with your US tax filing for the last 5 years, including paying any taxes, penalties and interest due.

You must then book an appointment with a diplomatic or consular officer at the US embassy or consulate where you live. They’ll ensure that you understand what you’re doing and ask you to pay a $2,350 fee.

Exit Tax

“Many experts believe that the main catalyst for this expatriate exodus has been the increasing onus of U.S. tax compliance. The Foreign Account Tax Compliance Act and other tax laws have made U.S. citizens living abroad more keenly aware of their obligation to file annually no matter where they reside, and more wary of the increasing costs associated with compliance and the potential penalties associated with non-compliance.” – CNBC

While this renunciation fee sounds like a lot, it’s nothing compared to what you’ll pay to renounce your US citizenship if the IRS consider you to be rich.

Specifically, if your net worth is over $2m, or if you’ve paid at least around $160,000 (the exact figure rises with inflation each year) of US income tax each year for the last 5 years, or if you haven’t filed and paid your last 5 years of US taxes.

If any of these applies to you, you’re considered a ‘covered expatriate’, and you’re liable to pay an exit tax, in the form of a capital gains tax on your assets.

The only exemptions are minors, and anyone who was born with dual citizenship.

Form 8854

If you renounce your US citizenship, you are required to file form 8854 along with your last US tax return for the year that you renounce.

Form 8854 asks for information related to your net worth to allow the IRS to determine whether you are a covered expatriate or not.

Consequences – Think Carefully

If you do decide to renounce your US citizenship, you should understand that it’s an irrevocable step, and that you’ll lose your rights as a US citizen. In particular, this limits your ability to enter the US without a visa.

Another consequence of not being a US citizen is a greatly increased exposure to Estate Tax on US assets; US citizens can shield $5.45m, whereas non-US citizens can only shield the first $60k.

Conversely, non-US citizens are not liable to pay estate tax on the value of their foreign assets.

In conclusion, renouncing US citizenship is a drastic measure that only suits those expats who are have permanently settled abroad, have foreign citizenship, have few or no US assets, and rarely travel to the US. For such individuals, after the initial hassle and cost of renouncing, they will probably feel a sense of relief at having escaped the US tax system. For all other expats, though we recommend you think very carefully before going down this road.

Lastly, if you need any advice regarding renouncing your US citizenship, get in touch, we can help.

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