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Giving Up US Citizenship and the Exit Tax - What You Need To Know

Giving Up US Citizenship and the Exit Tax - What You Need To Know
Ines Zemelman, EA
25-Mar-17

If you are considering renouncing your US Citizenship, you may be considered a ‘covered expatriate’ for the purposes of US taxation.

Are you considering renouncing your US Citizenship? You are not alone; record numbers of US Citizens and Green Card Holders are voluntarily surrendering their citizenship to escape the ever reaching arm of FATCA.  Albeit - keep in mind that millions of others are trying to obtain a Green Card at the same time, so it is all about perspective.

There are some facts you need, though, before deciding to take that leap, as it could wind up costing you hundreds of thousands of dollars.  If you are deemed a ‘covered expatriate’, you will be required to pay an exit tax (see below) before expatriating. On the flip side, if you are not ‘covered’ - then you will not have to pay an exit tax.

How do you define a covered expatriate?

You are a covered expatriate if:

  • Your average annual income tax during the five years prior to expatriation was at least $157K,
  • You have a net worth of at least $2M, or
  • You fail to certify that you have been compliant with all of your tax and reporting obligations for the previous five years before the date of expatriation.

The date of expatriation is considered to be the time at which you renounce your US Citizenship officially at a consular office or US embassy.

What is the exit tax and how is it calculated?

The exit tax is calculated by considering your global assets and taxing them as if they were sold on the day before your date of expiration.

Here’s what happens when the IRS is calculating your exit tax: 

  • The IRS assumes that all of your global assets were sold on the day before you officially expatriated.  There is a deduction of $680K, and the rest is taxed at the rate of up to 23.8 percent (20 percent maximum capital gains tax plus the 3.8 percent net investment income tax).

There are a few other questions that may affect your expatriation decision. 

Rights after expatriation

After renunciation, you have the same rights vis-a-vis the United States as any other citizen of your country.

Visiting the U.S.?

If you have citizenship from one of the 35 visa-waiver countries, you can travel visa-free to the U.S. for tourism or business for up to 90 days, just as any other citizen of your country may.

If your country of citizenship is not a visa-waiver country, then you can apply for a visa to the United States, and your visa application will be treated the same way just as any other citizen of your country would be treated.

Loss of U.S. Rights

When you renounce citizenship, you lose the right to live and work in the U.S.

  • You will not be able to vote in U.S. elections.
  • You will not be entitled to the protection of the United States overseas.
  • You will no longer be able to enter the U.S. and remain indefinitely.
  • Any children you have who are born after your renunciation will not receive U.S. citizenship from you.

Revocation of Expatriation

Renunciation of U.S. citizenship is final and irrevocable. You lose citizenship for the rest of your lifetime.There are no temporary renunciations or options to re-acquire U.S. citizenship. Once you renounce, you can never resume your citizenship.

Ines Zemelman, EA
Ines Zemelman, EA
founder of Taxes for Expats