What Happens If You Renounce Your US Citizenship?
Renouncing US citizenship is a major decision that should never be taken lightly. You should always understand the implications before severing your ties with the US. In this guide, we will explore what happens if you renounce your citizenship. Here’s what you need to know!
Reasons for Renouncing Your Citizenship
People can renounce their citizenship for a variety of personal or political reasons. Below are some of the most common reasons individuals take this significant step.
1. Escaping US Taxes
The US is one of the few countries in the world that have citizenship-based taxation. This means that US citizens are subject to taxation regardless of where they live. Even Americans living overseas have to file a US tax return every year and potentially pay taxes on their worldwide income. Because of this, some Americans may choose to renounce their citizenship after moving abroad to avoid having to file or pay US taxes.
2. Avoiding Additional Filing Requirements
US citizens living abroad are required to comply with a host of US laws, including the Foreign Account Tax Compliance Act (FATCA) and the Bank Secrecy Act, which mandates financial accounts and other foreign assets to be reported on a FATCA report and a Foreign Bank Account Report (FBAR). Renouncing US citizenship removes these burdens, simplifies obligations, and cuts down on paperwork.
3. Personal or Political Reasons
For some, renouncing US citizenship is a political statement. They may disagree with US policies or feel a stronger allegiance to another country. In other cases, individuals may seek to avoid the implications of US law in their personal lives, such as issues related to privacy, freedom, or legal accountability.
4. Avoiding Future Legal Concerns
Some individuals opt to renounce their US citizenship to avoid potential future legal liabilities, including prosecution or financial obligations related to their status as US citizens. While renouncing citizenship does not erase past liabilities, it can prevent future entanglements with US law. This is particularly relevant for those with complex financial situations or who may be at risk of legal challenges from US authorities.
5. Dual Citizenship Restrictions
In some cases, American expats want to become citizens of a country that does not allow dual citizenship. This means they will have to renounce their US citizenship first. Until they do, they cannot seek naturalization in their adopted country.
Renouncing Your US Citizenship: Key Steps
- Secure a Second Passport: Obtain citizenship in another country before renouncing to avoid becoming stateless, which could affect your ability to travel, work, or access services.
- Prepare Forms and Documents: Complete the required forms (DS-4079, DS-4080, DS-4081) and ensure you’ve been tax-compliant for the last five years to avoid complications.
- Book and Attend Your Appointment: Schedule and attend an in-person appointment at a US embassy or consulate outside the US. A $2,350 fee is required.
- State Department Approval: After the appointment, the US Department of State reviews your case for final approval.
- File Final Tax Return: Submit a final tax return, including Form 8854, to ensure compliance with US tax laws for the year of renunciation.
To learn more about each step in detail, visit our comprehensive knowledge center article on renouncing US citizenship.
Financial and Tax Implications of Renouncing Your Citizenship
Renouncing US citizenship has significant financial and tax consequences that must be carefully considered. These implications can vary depending on your net worth, income level, and tax compliance history.
Exit Tax
One of the most critical financial consequences of renouncing US citizenship is the potential exit tax. This tax applies to individuals classified as “covered expatriates.” You may be considered a covered expatriate if you meet any of the following criteria:
- Your net worth exceeds $2 million on the date of renunciation
- Your average annual US income tax liability for the five years prior to renunciation exceeds a specified threshold (adjusted annually for inflation — $201,000 for renunciations occurring in 2024)
- You have not complied with all federal tax obligations for the five years preceding the renunciation
If you are a covered expatriate, the IRS treats your assets as if they were sold at their fair market value the day before you renounce your citizenship. This “deemed disposition” can result in a capital gains tax liability. However, the first $821,000 (as of 2024, adjusted annually for inflation) of these gains is exempt from taxation.
Example: If your total unrealized capital gains are $1 million, and the exemption is $821,000, you would only be taxed on $179,000 of those gains. The tax rate applied would be based on the capital gains tax rates in effect at the time.
Social Security and Other Retirement Benefits
Renouncing your US citizenship does not automatically disqualify you from receiving Social Security benefits, but it can complicate the process. Your eligibility to continue receiving these benefits depends on whether the US has a totalization agreement with the country where you reside. If there is a totalization agreement in place, your benefits may be reduced, suspended, or even terminated.
Additionally, Medicare benefits are generally not available outside the US, which could impact your access to healthcare after renunciation.
Withdrawals from US-based retirement accounts (e.g., 401(k), IRA) after renunciation may also be subject to higher tax rates and withholding requirements. Understanding the implications for your specific retirement plans will help you avoid unexpected taxes.
Impact on Estate and Gift Taxes
As a former US citizen, your estate and gift taxes may also be affected. The US imposes estate and gift taxes on the worldwide assets of its citizens and residents. After renouncing, these taxes will generally only apply to your US-sourced assets. However, if you remain a covered expatriate, your US heirs could be subject to an additional tax on any gifts or inheritances they receive from you.
Example: If you own property in the US and gift it to a family member after renunciation, the recipient may be subject to a 40% tax on the value of the gift if you are a covered expatriate.
Considerations for Business Owners and Investors
If you own a business or have significant investments in the US, renouncing citizenship can trigger additional tax consequences. For instance:
- Retained earnings in foreign corporations: If you have ownership in a controlled foreign corporation (CFC), you may need to pay taxes on the retained earnings of that corporation before renunciation.
- US-based investments: After renunciation, income from US-based investments, such as dividends or rental income, may be subject to a flat tax rate, typically 30%.
Legal and Social Considerations
Renouncing US citizenship involves more than just financial and tax implications; it also carries significant legal and social consequences. These considerations can affect your rights, legal obligations, and social standing both in the United States and internationally.
Loss of US Citizenship Rights
Renouncing your US citizenship means giving up all the rights and privileges associated with being a US citizen. This includes:
- Voting rights: If you reside abroad, you will lose the right to vote in US federal, state, and local elections, including absentee voting.
- Access to US government services: You will no longer be entitled to the protections and services provided by US embassies and consulates, such as emergency assistance, evacuation during crises, or legal support abroad. This loss can be particularly impactful if you encounter legal or health issues while living in a foreign country.
- US passport: You will have to surrender your US passport, and any future travel to the US will require a visa. The visa application process may be more stringent for former US citizens, and there is no guarantee of entry, especially if you have any legal or financial issues with the US government.
Immigration and Travel Restrictions
After renouncing US citizenship, your ability to travel to and from the United States will be significantly restricted. As a former US citizen, you will need to obtain a visa or use the Visa Waiver Program (VWP) to enter the US.
However, your right to enter is not guaranteed. The US government can deny entry for various reasons, including previous violations of US laws, perceived security risks, or past immigration issues. Thus, former US citizens may face challenges re-entering the US, especially if they have unresolved legal or tax obligations.
Impact on Family Members
Renouncing your US citizenship can have legal implications for your family, particularly if they are still US citizens:
- Impact on children: If your children are US citizens, your renunciation does not affect their citizenship status. However, it may complicate their ability to inherit property or assets from you without facing additional tax burdens. Additionally, if your children are minors, they cannot renounce their US citizenship unless they demonstrate to a US consular officer that they fully understand the consequences and are acting voluntarily.
- Marriage and spousal rights: If you are married to a US citizen, renouncing your citizenship may affect your ability to sponsor them for visas or citizenship in other countries. Furthermore, your spouse may face complications in inheriting assets or property from you if they remain a US citizen.
Legal Accountability and Obligations
Renouncing US citizenship does not absolve you of any legal responsibilities or liabilities you had as a US citizen. If you have committed any crimes while a US citizen, renouncing citizenship does not protect you from prosecution by US authorities. You may still be subject to extradition or other legal actions if you return to the US or if your country of residence cooperates with US law enforcement.
If you were required to register with the Selective Service (as all US male citizens between 18 and 25 are), renouncing citizenship does not negate this obligation. However, without US citizenship, you would no longer be subject to conscription in the event of a draft.
Renouncing Citizenship FAQs
Will I Still Owe US Taxes After Renouncing My Citizenship?
Yes, renouncing your US citizenship does not immediately end your tax obligations. You are required to file a final US tax return for the year of renunciation, covering the period up to the date you officially renounce your citizenship. Additionally, if you are classified as a “covered expatriate,” you may be subject to an exit tax, which is a tax on your worldwide assets as if they were sold the day before your renunciation. You must also file Form 8854, certifying that you have fulfilled all US tax obligations for the five years prior to renunciation.
What Happens to My US-Based Assets After Renunciation?
After renouncing your US citizenship, you can still own property and other assets in the United States, but you may face different tax and legal obligations. For example, income from US-based assets, such as rental properties or investments, may be subject to a flat withholding tax of 30% unless a lower rate applies under a tax treaty between the US and your new country of citizenship. Additionally, your heirs might face higher taxes on any US-based assets they inherit from you if you are classified as a covered expatriate”.
Greenback Can Help You Simplify (And Reduce) Your US Expat Taxes!
If you choose to renounce your citizenship, Greenback Expat Tax Services can prepare and file the tax documents needed to resolve your US tax obligations.
We’ve already helped more than 18,000 expats file over 60,000 returns in 193 countries — all while maintaining glowing reviews. Now, we’re ready to do the same for you!
Have questions about the process or next steps? Contact us, and one of our Customer Champions will happily address all your concerns.
When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.
