We’ve previously discussed the rising number of citizenship renunciations, but according to the latest reports, that number has jumped even higher on an annual basis. In fact, there was a 26.5% jump in renunciations in 2016 (5,411) as compared to 2015 (4,279). For some US expats, the act of renouncing citizenship is simply a symbolic act of their desire to cut ties with the US (a la Boris Johnson’s recent renunciation) but for many, doing so is simply a way to avoid paying US expat taxes. However, the process isn’t as clear-cut as one might expect – so get the facts below so you can make an informed decision.
Giving Up Your Citizenship
While the thought of renouncing citizenship might sound simple enough, there are certainly considerations to be made. Renouncing means that in addition to forgoing expat taxes, you are relinquishing all of your rights that come along with your US nationality status, so for example, entering the US will no longer be as easy. This could prove challenging if you have family in the US or have other reasons to visit often, as you’ll be required to have a visitor’s visa and there may be limits on the amount of time you can spend in the States.
Also, don’t forget, you can’t be ‘stateless’ – meaning you must have citizenship in a new country before you can actually renounce your US citizenship.
Reasons US Expats Choose to Renounce
Understandably, the process of filing US expat taxes can be complicated. Factor in local taxes and trying to avoid double taxation and keeping track of deadlines, and it’s easy to see why renouncing citizenship might sound like a good idea. Also, FATCA Form 8938 regulations have caused a heavy burden to Americans living abroad in terms of foreign income reporting. In our recent US Expat Opinion Survey, over half of respondents said they would support an initiative to repeal FATCA and over 12% said they’ve had to switch banks because their foreign financial institution doesn’t want to deal with the complicated nature of working with US citizens. You can read more about the survey results here.
The Process of Cutting Ties with the US
If you thought severing your tie to the US was going to be as easy as filling out paperwork and tossing your passport, you’ll want to think again. In fact, if you are planning to renounce as a way to erase your US expat tax obligation, you should know that cutting ties with the US doesn’t eliminate the expat taxes you already owe. You must be up to date on all of your US expat taxes before you can consider renouncing – and you must show that you’ve paid five years’ worth of taxes prior to beginning the process.
Renouncing is also not cheap – in fact, the US has the world’s highest renunciation fee, at $2,350, meaning the US government is making money off your decision to part ways with the country. Not to mention, some US expats are required to pay an exit tax in the year he or she renounces.
- This tax may apply to you if your annual income tax liability over the past five years is more than $160,000 or if your net worth is more than $2 million. Click here to read more about the exit tax on the IRS website.
- The tax could also apply to you if you haven’t complied with your US expat tax obligation for the five years preceding your renunciation. Ensuring you’ve been compliant on your taxes is a critical step before making the decision to sever ties with the US, in order to reduce the amount you’ll owe for completing the process. Download our guide for getting caught up on late US taxes to learn more about becoming compliant with the IRS.
Making the decision to renounce your citizenship is something you’ll want to carefully consider, as the implications involved are very serious and often complicated. Consulting with a tax professional regarding your expat tax questions is recommended if you’re considering renunciation, so you can be sure you are compliant on your US expat tax obligations before making this costly decision!
Have Questions About How Renouncing Your Citizenship May Affect Your US Expat Taxes?
Our expat-expert CPAs and IRS Enrolled Agents are here to help you navigate the often-complex nature of US expat taxes. Contact us today to get the expat tax advice you need!