With the mounting frustration over US taxes and FATCA, it isn’t hard to understand why many US expats are considering renouncing their US citizenship. And while it may be surprising to some, the US doesn’t ‘punish’ you for renouncing and revoke the privileges you earned during your time as a citizen. You can renounce your citizenship, avoid (most) future US taxes and still receive the income/benefits from the US from which you are entitled.
Renounce Citizenship and Retirement
1. Non-covered expatriates have no immediate US tax liability.
To renounce your citizenship, you must file Form 8854 with your final tax return to determine if you are a “Covered Expatriate” or a “Non-Covered Expatriate”. A Covered Expatriate may be subject to an exit tax. This is the IRS’ way of ensuring you aren’t renouncing your citizenship simply to avoid a hefty US tax payment–they want their money before you go! To be considered a Non-Covered Expatriate, and therefore exempt from the exit tax, the following requirements must be met:
- You must have filed taxes for the 5 years preceding the year you renounce your citizenship.
- If you were born a dual citizen and are taxed as a resident of the other country (i.e. you were born to UK Citizen Parents in the United States and are now living in the UK and paying taxes there) you can not have lived in the US for more than 10 of the last 15 years.
- If you were not born a dual citizen you must meet all of the following criteria along with #1 above
- Your average annual net income tax liability for the preceding 5 years cannot exceed $168,000 for 2019.
- You net worth, including retirement accounts and real property both inside and outside the United States must not be more than $2 million on the date you renounced – you can gift up to $155,000 (in 2019) to a nonresident alien spouse each year without having to pay a US gift tax. Anything owned jointly with a nonresident alien spouse will be included in your net worth at 50% of the balance.
- You must have renounced your citizenship in the year in which you are filing Form 8854.
If you are a covered expatriate you may be required to pay an exit tax based on your deemed gain on items you own, i.e. real property, stocks, bonds, partnerships, etc. Any deferred compensation plans that you own are taxed one of two ways; you either elect to have received a full payout the day before your renunciation and are taxed accordingly on Form 1040, or you can elect to forego any tax treaty benefit on these items and the distributions will be taxed at 30% when you choose to cash them out.
Remember that even after your renounce, you may still have US tax filing requirements (and thus potential US tax) if you hold property, investments or financial assets located in the US.
2. You don’t need to liquidate your assets and investments in the US when you renounce.
Once you have renounced your US citizenship, you are considered a non-resident alien (NRA) so the financial activity on investments and/or assets in the US will need to be reported on Form 1040NR instead of the 1040 you were filing.
Any investments that you retain in a US account are treated as follows:
- The cost basis of any stocks, mutual funds, bonds or other capital assets will now be the value as of the day before your renunciation
- You will need to notify all banks and brokerage houses of your new status by filing form W-8CE
- You will still receive a year end statement listing all of your interest, dividends and capital gains
- You will be required to file for 1040NR for any income received from US sources
- Your tax rates for various items will be dependent on the country in which you are a resident and any tax treaty the US has with that country.
- Non-business related income will be taxed at 30% unless the tax treaty states otherwise.
- Business related income is taxed using the tax tables provided by the IRS. It uses similar tax rates and brackets as Form 1040.
3. Social Security benefits are generally available to those who qualify.
There are specific US Social Security rules for NRAs so it’s important to understand the rules and exceptions. But in general, if you have paid into Social Security for a full 40 quarters you will be eligible to collect benefits when you retire.
As an NRA, you can generally continue to collect US Social Security just as you would if you remained a US citizen. However, there are several factors that impact this: US bilateral agreements (or lack thereof), your current citizenship, your country of residence, etc.
Depending on these factors, you may just get a minor tax adjustment or you may have your payments discontinued after you are outside the US for six months.
But even if the latter happened and your payments were discontinued, you would simply need to return to the US for one full month (midnight to midnight) every six months to continue your payments.
For example, if you are a citizen of one of the countries listed below, you may continue get payments as long as you are outside the US unless you are receiving your payments as a dependent or survivor. (In those cases, the SSA requires you meet additional requirements.)
- Albania • Antigua and Barbuda • Argentina • Bahama Islands • Barbados • Belize • Bolivia • Bosnia Herzegovina • Bulgaria • Brazil • Burkina Faso • Colombia • Costa Rica • Côte d’Ivoire • Croatia • Cyprus • Dominica • Dominican Republic • Ecuador • El Salvador • Gabon • Grenada • Guatemala • Guyana • Hungary • Iceland • Jamaica • Jordan • Latvia • Liechtenstein • Lithuania • Macedonia • Malta • Marshall Islands • Mexico • Micronesia, Fed. States of • Monaco • Montenegro • Nicaragua • Palau • Panama • Peru • Philippines • Romania • St. Kitts and Nevis • St. Lucia • St. Vincent and the Grenadines • Samoa (formerly Western Samoa) • San Marino 7 • Serbia • Slovakia • Slovenia • Trinidad-Tobago • Turkey • Uruguay • Venezuela
Those who renounce their US citizenship but are not a citizen of one of the countries listed above will stop receiving payments after they have been outside the US for six full calendar months unless certain exceptions are met. One common way many US expats retain eligibility is through residence. If you are a resident of one of these popular expat countries, you can continue to receive payments regularly:
- Australia • Austria • Belgium • Canada • Chile • Czech Republic • Denmark • Finland • France • Germany • Greece • Ireland • Italy • Japan • Korea (South) • Luxembourg • Netherlands • Norway • Poland • Portugal • Spain • Sweden • Switzerland • United Kingdom
Please note there are a handful of countries to which Social Security cannot make payments (including Cuba, North Korea, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam.). Only US citizens can accumulate unpaid payments while in these countries and receive them after departing the country; NRAs lose those payments entirely.
Conclusion on renouncing citizenship and retirement
In a nutshell, renouncing your citizenship doesn’t mean you have to give up the retirement benefits or income that you have always planned for. It is important to educate yourself on the impact of your renunciation to ensure you fully understand the immediate tax implications, as well as the long-term tax filing requirements you may still have if you choose to leave assets in the US. But overall, the news is very good for US expats who wish to turn in their passports and enjoy retirement in the country they have always dreamed of!