Three Hidden Disadvantages to US Expatriate Citizenship Renunciation

Each year, our expat opinion survey shows that citizenship renunciation weighs heavily on the minds of expats everywhere, and the US taxation system is often cited as the reason. Renouncing US citizenship may seem like a good decision – especially if you have dual citizenship or have been living outside the US for several years and plan to do so indefinitely. By giving up your citizenship, you will not have to file the annual tax returns to declare your worldwide income to the IRS. However, if you are a US expatriate, consider the following reasons before you move forward so that you can be sure your decision is fully informed.

1. You’ll Be on the Hook One Last Time

Even though you will not have to file US tax returns in the future (unless you receive income sourced in the US), you will need to file a final tax return to report income and deductions from January 1 to the date of the oath of renunciation taken at the US Embassy.

2. You May Still Face a Hefty Tax Before You Renounce

Section 877A of the Internal Revenue Code, enacted in 2008 under the Heroes Earnings Assistance and Relief Act, establishes a stringent exit tax applicable to covered expatriates. What exactly is a covered expatriate? It’s an individual who meets any portion of a three-part test and who is renouncing their US citizenship after June 17, 2008. The three-part test requirements are met if any of the following are true:

  • Net Worth Test – individual had a net worth of $2 million or more at the time of renunciation
  • Tax Liability Test – individual had an average annual net income tax liability of more than $165,000 USD in the last five years ending before the date of renunciation
  • Compliance Test – individual failed to certify that they had complied with all US federal tax obligations for the last five years preceding the date of expatriation.

Exceptions to the exit tax apply to dual citizens who were born in and continue to live in the country of their other nationality and to citizens who did not live in the US for more than 10 years before the age of 18 ½ years.

3. Every US Expatriate Will Be Charged a Fee

There is a fee to give up your US citizenship! The US government charges a $2,350 fee to relinquish US citizenship. And other tax considerations may apply in specific situations, so we advise that you discuss your specific circumstances with an experienced expat tax accountant so that you have all your bases covered.

US Expatriate Tax Compliance Is Easier Than You Think

Whether or not you decide citizenship renunciation is the best decision for you, you’ll need to be up to date on your expat taxes to proceed. Let us do the heavy lifting so that you can rest easy that your taxes are accurate. Get started now!

Free Guide: The 25 Things Every Expat Needs to Know About Taxes

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