Citizenship renunciation has been a hot topic, especially over the past several years, with strict FATCA regulations in place and the general distaste for filing US tax for expats while living outside the US. The US Treasury Department keeps track of who renounces and releases a list each quarter, sharing the number of renunciations that occurred for that three-month period. The latest list, recently released, continues to show the upward trend of US expats choosing to cut ties with the US.
The Latest Numbers
According to the Treasury Department, 1,313 citizens chose to renounce their citizenship from January through March 2017. In 2016, there were a total of 5,411 renunciations – up 26% from 2015. If the first three months of this year are any indication of how renunciations will go the rest of the year, it looks as though it will be similar to 2016 totals. While the thought of renouncing might seem like the best choice to avoid US tax for expats, you will need to consider the implications of making such a big decision – get the facts below.
Renouncing Citizenship: Is It Right for You?
The desire to renounce citizenship can be brought on by many things – US tax for expats, banking issues due to FATCA, or simply not feeling like the US government has the interest of expats in mind. While understandably, those things can make severing ties seem easy, the process and effects of doing so are something to carefully think through.
When you give up your citizenship, it means you’re waiving all of your rights and privileges that come with your US nationality, like the ability to easily enter the US. If you don’t intend to return, that may not be a big deal to you. However, if you have family located in the US or have other reasons to visit frequently, doing so will become much more difficult (example: you’ll need a visitor’s visa and visits may be limited to 120 days or fewer). Also note that you’ll need to have citizenship established in another country before you can renounce your US citizenship.
The Expat Tax Impact
The thought of avoiding US tax for expats can be enough to make Americans working overseas want to renounce, but you should know that you may be required to pay an exit tax for the year you renounce. For the 2017 tax year, the tax may apply to you if your annual income tax liability over the past five years is more than $162,000 or you have a net worth greater than $2 million.
The exit tax may also apply if you haven’t complied with your US tax obligation for the 5 years preceding renunciation. That’s why it’s important to ensure you’re all caught up before making such an impactful decision!
When You’re Ready to Renounce
If you’ve carefully considered renouncing your citizenship and feel that it’s the right decision for you, you’ll want to prepare by doing the following:
- Be sure you’re aware of the legal requirements of the State Department and US Embassy or Consulate. Read more on the State Department’s website.
- Be prepared to file the required tax documents, including a Request for Determination, Oath of Renunciation and a Statement of Understanding.
Once you’ve made a request to meet with a US diplomatic or consular office outside of the US or its territories, the renunciation process can begin. The purpose of this appointment is to ensure you’ve completed necessary paperwork and you’re aware of the effects of renouncing citizenship.
If you’re considered a covered expatriate and are subject to the exit tax, you may need to file Form W-8CE if you have a deferred compensation item, a tax-deferred accountant or an interest in a non-grantor trust.
The Last Step
The final step in the process is completing Form 8854, the Initial Expatriation Statement. You’ll use this form to report the fair market value of your assets and liabilities and file it along with your US Tax Return. You can learn more about Form 8854 in this article.
Renouncing US citizenship is a monumental decision, and one that shouldn’t be taken lightly. Consider discussing the process with a tax professional for expat tax advice before beginning to ensure you’re fully prepared.
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