Reviews 4,000+ Verified REVIEWS
Pricing plans
Compare all plans
Tax Guide
Pricing plans
Compare all plans
Tax Guide
All articles

Considering Giving Up Your US Citizenship? Facts You Need to Know About Social Security.

Considering Giving Up Your US Citizenship? Facts You Need to Know About Social Security.
Ines Zemelman, EA
15 November 2015

The number of US Citizens renouncing their citizenship has been growing consistently for the past few years.

In 2014, the record number of 3,415 was set on US Citizens renouncing their citizenship.  A previous record was set in 2013 with 2,999 renunciations, and that was up around 2,000 from the 932 who expatriated in 2012. More and more US Expats are cutting ties with the United States to get out from under the long and strong arm of FATCA.

You may or may not be taxed upon expatriating. It depends on whether you are a covered expat or an uncovered expat.

Before you are able to renounce your US Citizenship, you will be required to file Form 8854 and attach it to your final tax return.  Form 8854 will help the IRS determine your status as an uncovered or covered expat.

If you are a covered expat, you will most likely be subject to an exit tax.  This is the method the IRS uses to ensure that you aren’t renouncing your US Citizenship just to avoid paying past due taxes.

To qualify as an uncovered expat, each of the following statements must be true:

  • You have filed your income tax return for the previous five years
  • Your annual net income tax liability for the previous five years does not exceed $157K or 2014.  The threshold for 2015 is yet to be determined.
  • Your net worth (this includes retirement accounts, bank accounts, and the value of property you own inside and outside of the United States) is below $2M on the date of your renunciation.  Remember that you are allowed to gift up to $145,000 to a nonresident alien spouse every year and avoid paying gift taxes.  Anything you own jointly with a non-resident alien spouse will be included in your total net worth as 50% of its actual value.
  • You must file form 8854 in the year following the year when you renounced your citizenship/surrendered the green card  .
  • If you have dual citizenship and you are taxed as a resident of a foreign country, you haven’t spent more than 10 years out of the last 15 years in the United States.

If you are deemed a covered expat by the IRS, you will be liable to pay an exit tax.  The exit tax is based on the perceived value of your assets.  On the day you expatriate, the IRS will assume that you liquidated your assets.  You are taxed on the amount of assumed income.  If you own any deferred compensation plans in the United States, you may choose to either get a full payout on the day prior to your renunciation and pay the current tax rate on that income or you may choose to keep the account as it is and agree to pay a 30% tax rate when you begin to receive distributions.

You may still be required to file a US expat tax return even after you expatriate – especially if you are holding property or other investments in the US.

Even though the IRS taxes you on the perceived income from your assets, you don’t have to actually liquidate them.  One you renounce your US Citizenship, you are considered to be an NRA (nonresident alien), and all the investments that you own in the United States will be reported on Form 1040NR as opposed to Form 1040.

Here some pieces of information and some tips that will help you remain in good standing with the IRS after your expatriation:

  • Notify every bank and brokerage house of your updated status with Form W-8CE.
  • If you keep your accounts open, you will receive a statement at the end of the year. This statement will reflect your capital gains, dividends and interest.
  • If you earn income from any US source, you will be required to file Form 1040NR
  • You will have variable tax rates, depending on where your income is earned and the treaty held between the United States and your new country of residence.
  • Income that is not “effectively connected” to will be taxed at 30% unless the tax treaty stipulates a different rate
  • If you have income that is related to your business, it will be taxed according to the tax tables available when you file your next US expat tax return in the instructions for Form 1040 NR.

If you qualified for Social Security Payments as a US Citizen, then you will still be eligible to receive benefits even after you renounce your citizenship

Generally speaking, if you have qualified for Social Security by working and paying into the program for 40 quarters, then you will be eligible to collect benefits as an expatriate and retire in a foreign country.  Keep in mind, though, that there are a variety of factors which would render you ineligible to receive benefits, so it’s important to perform due diligence and get the facts which are specific to your individual situation.

Some of the factors that will determine whether or not you are eligible to receive benefits will include US bilateral agreements (or no agreement whatsoever), your country of residence, and your current citizenship.  When these factors are taken into consideration, the IRS may impose minor adjustments or they could discontinue your payments altogether.  If your payments were terminated because of your country of residence or another factor, you will be eligible to receive payments again if you spend at least one full month in the United States.  For eligibility, a full day is defined as midnight to midnight.

The Green Zone: If you live in one of the following countries, your payments will continue without interruption regardless of your citizenship status.

Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden Switzerland, and United Kingdom.

The Yellow Zone: If you are a citizen of one of the countries listed below, you may receive your payments as long as you are outside the U.S.  If you reside in one of those countries yet not as a citizen, then your eligibility for future benefits will depend on various factors. This simple screening tool will check for how long you will remain eligible to receive the benefits:

Albania, Antigua and Barbuda, Argentina, Bahama Islands, Barbados, Belize, Bolivia, Bosnia Herzegovina, Bulgaria, Brazil, Burkina Faso, Colombia, Costa Rica, Côte d’lvoire, 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, Monaco, Montenegro, Nicaragua, Palau, Panama, Peru, Philippines, Romania, St. Kitts and Nevis, St Lucia, St. Vincent and the Grenadines, Samoa (changed from Western Samoa), San Marino, Serbia, Slovakia, Slovenia, Trinidad-Tobago, Turkey, Uruguay, and Venezuela.

The Red Zone: The following list of countries is comprised of foreign territories to which the United States is unable to send any payments at all.

Azerbaijan, Belarus, Cuba, Georgia, Kazakhstan, Kyrgyzstan, Moldova, North Korea, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam.

Only US Citizens can live in one of these countries while their unpaid distributions accumulate.  Once you are regarded as an NRA, you will lose out on your payments completely.

Ines Zemelman, EA
Founder of TFX