Introduction: Citizenship and US Expat Taxes
Surrendering US Citizenship has become a common topic among expatriates, predominantly due to the increasing responsibility associated with US expat taxes and difficulty in banking. There has been a lot of media “noise” around renouncing citizenship recently, mainly due to Eduardo Saverin renouncing his citizenship ahead of the Facebook IPO and the backlash from Sen. Charles Schumer and Sen. Bob Casey and their proposed Ex-Patriot Act. There is an increasing trend with individuals renouncing US citizenship, but the absolute numbers are quite small:
People Renouncing US Citizenship
Lower Estimate of US Citizens Abroad
Percentage of US Citizens Abroad Renouncing Citizenship
Anecdotally, it appears that the rate of people renouncing US citizenship is tied to increased government efforts to enforce US tax regulations on US citizens living abroad. That is to say, increased awareness of the need to file US expat taxes and Foreign Bank Account Reports seems to have an impact on people’s decision to renounce citizenship, as the major increases have come after the 2009 voluntary disclosure program. Perhaps people who had US citizenship but did not feel especially tied to the United States started to find the compliance side of citizenship outweighed the benefits of being a US citizen.
The decision to renounce US citizenship should not be taken lightly: once it has been renounced, you can never get your citizenship back. Additionally, if the Ex-Patriot Act is passed you may never actually be able to visit the US again. For our purposes, we won’t focus on the political side of all this, but will instead look at the US expat tax implications that should be considered before renouncing your US citizenship.
Reasons to Consider Renouncing Your US Citizenship
There are numerous reasons why US expats have begun considering renouncing their US citizenship. While increasing burden regarding US expat taxes is the most glaring reason, there are other motives as well.
The United States is one of only two countries that taxes its citizens on their worldwide income when they live abroad. (Just in case anyone ever asks you: the other country is Eritrea, located in the Horn of Africa.) With each passing year, the tax laws for expatriates become increasingly more complex, and the associated penalties for noncompliance even more stringent. Although the US offers exclusions and credits on US expat taxes to curtail dual taxation, these are often not enough to offset the income of high-earning expats. The resulting dual taxation is a worthy consideration to renouncing a US citizenship.
In addition to the risk of double taxation, there are also other burdensome reporting requirements for US citizens living and working abroad. For example, the IRS requires any US citizen who has financial authority over foreign bank accounts whose cumulative balances exceed USD $10,000 to file an annual report separate from their US expat taxes. Failing to file this annual report (Form FinCEN 114, Report of Foreign Bank and Financial Accounts) can result in civil and criminal penalties. Ensuring compliance with all of these US reporting requirements can be overwhelming, and often prompts expats to enlist the help of a professional. Accountants who specialize in international services frequently charge amplified hourly rates, again adding to the burden placed on expats. Like domestic tax law, the US expat tax laws are constantly changing and will continue to do so as time progresses, making it unlikely that the process will be easier for expats in the future. Because of this, renouncing US citizenship could be attractive to some expats looking to simplify paperwork and administrative duties.
In addition to the increased reporting and tax liability associated with US expat taxes, another reason that many expats are considering renouncing their US citizenship is the difficulty in maintaining banking relationships, both foreign and domestic. Several expats have reported that their US banks have closed their accounts due to the individual application of anti-terrorist regulations. Although the US government has not required banks to close the accounts of holders who do not have a permanent US address, some banks have taken it upon themselves to do so. However, the US reporting requirements is not limited to individual taxpayers. It also impacts foreign banks with US citizen account holders as well. These banks are required to report the accounts and balances of US citizen account holders to the US government or face a 30% withholding penalty on their US assets. The additional reporting requirement could make US citizen clients unattractive for many foreign banks. For this reason, some foreign banks are hesitant to open new accounts for US citizens and even closing accounts for existing clients. If neither US nor foreign banks are willing to work with them, expats may look at renouncing their US citizenship as a straightforward solution to a difficult problem.
How to Renounce Your US Citizenship
It is likely that the most difficult part about renouncing your US citizenship will be making the decision to do so. After that, there are four simple steps Americans must take in order to make it official with the US government:
- Obtain a Second Passport – Before the State Department will consider your renunciation application, they will require proof of your second passport.
- Complete the Renunciation Questionnaire (Form DS-4079 – Information for Determining Possible Loss of US Citizenship) – This five-page form asks questions regarding your citizenship status and should be completed prior to your visit with the US embassy or consulate in your resident country.
- Renunciation Appointment – You will be required to physically go to the US embassy or consulate in your resident country for your renunciation appointment. Here, you will work with the representatives to complete the rest of the required forms. Be prepared with copies of both of your passports and a copy of your birth certificate, too. The appointment will end with you taking an Oath of Renunciation and being provided with a Certificate of Loss of Nationality.
- Final Tax Return – The final step in the renunciation process is the filing of your final tax return. If you surrender your citizenship on any day other than December 31, your final US expat tax return will be a 1040NR for the period from January 1 until your renunciation date. Form 8854 will need to be filed with your final US expat taxes, as it is used to calculate the “exit tax” for taxpayers who have renounced their US citizenship.
It is important to note that even though you will never be required to file an expatriate tax return again, the renunciation of your US citizenship is irrevocable. You can still visit the US on a tourist visa (for now), which allows up to a 90-day visit, but you will never be able to obtain US citizenship again. In addition, if you are retired from the military, surrendering your US citizenship will act as forfeiture of your military retirement benefits. The good news is that social security distributions can continue despite the renunciation of citizenship, as long as you reside in a country to which the SSA will send payments.
Exit Tax Implications
On June 17, 2008, the Heroes Earnings Assistance and Relief Tax Act of 2008 passed through Congress with a unanimous vote. The implementation of this act imposed an “exit tax” above and beyond standard US expat taxes on “covered expatriates” who surrender their US citizenship. You are considered a “covered expatriate” and thus subject to the exit tax if you meet three conditions:
- A net worth greater than USD $2,000,000
- Your average net income tax for the five years before you expatriate is more than the following – 2011 – $147,000, 2012 – $155,000, 2013 – $155,000 (note these figures are adjusted for inflation)
- Absence of a certification of compliance with US tax requirements for five years prior to renunciation – you certify that you have filed for the past 5 years on Form 8854
If you’re lucky enough to have a net worth high enough to make you a “covered expatriate,” you will be subject to an additional tax above and beyond your normal US expat tax liability. This is because the IRS is considering your net worth as if all of your assets were sold on the day before you renounced your US citizenship. For the 2013 tax year, you will be able to exclude the first $663,000 of gain from this “sale” of your assets. The exclusion doubles if you file a joint US expat tax return with your spouse, when both spouses have renounced their citizenship. The gain will be calculated subtracting the original acquisition cost from the market value of each asset on the date of expatriation.
This exit tax can have a large impact on your final US expat taxes, but it can be minimized with proper planning with the help of a professional expatriate tax services firm.
Questions About US Expat Taxes and Renouncing Citizenship?
Greenback Expat Tax Services was featured in a Yahoo! News article discussing citizenship renunciation and US expat taxes; click here to read about that. If you have any questions or would like to learn about our expat tax services, please contact us.