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Renouncing your US citizenship: A deep dive into tax implications for expats

Renouncing your US citizenship: A deep dive into tax implications for expats

As globalization continues to redefine lifestyles and career choices, an increasing number of US citizens are considering the option of renouncing their citizenship.

If you’re among those contemplating this step, understanding the tax implications is crucial.

In this guide, we will delve into various aspects related to renouncing US citizenship, tax considerations, and other key facets of this significant decision.

What does it mean to renounce US citizenship?

Renouncing US citizenship means you are voluntarily relinquishing your status as a citizen of the United States.

According to Section 349(a)(5) of the Immigration and Nationality Act, this formal process must occur before a US diplomatic or consular officer in a foreign country. It involves paperwork, an interview, and an oath of renunciation.

Renouncing your US citizenship is not a decision to be taken lightly. It involves complex legal processes and has far-reaching consequences, including the loss of your rights as a US citizen and potential tax obligations.

Consequences of renunciation

  • Loss of US citizenship benefits such as voting rights, US government protection abroad, and unrestricted travel to the US.
  • Possible tax liabilities (which we'll elaborate on in the following sections).
  • In most cases, renunciation is irrevocable.

"Renunciation is a grave step to take and should be considered carefully. It means parting ways with your country and giving up the rights and privileges that come with being a US citizen."  -  Edward A. Weiner, CPA, CFP, PFS.

What is the difference between relinquishing and renouncing US citizenship?

Renunciation is a voluntary act of formally giving up one’s citizenship, typically done at a US Embassy or Consulate.

In contrast, relinquishment can occur automatically through certain actions, such as obtaining citizenship in another country with the intention of giving up US citizenship.

Renouncing US citizenship (step by step)

  1. Contemplate your decision: Evaluate the personal, social, legal, and financial implications of renouncing your US citizenship. Consider speaking with a tax expert and an immigration attorney.
  2. Secure another citizenship: Before you can renounce your US citizenship, you must have citizenship in another country to avoid becoming stateless.
  3. Schedule an appointment with a US consulate or embassy: This should be done in the country where you are residing. Complete the required forms, including DS-4079 and DS-4080.
  4. Attend the appointment: During this appointment, you will undergo an interview to confirm that you understand the consequences of your decision, and you will take an oath of renunciation.
  5. Pay the fee: Currently, the fee for renunciation is $2,350.
  6. Await the certificate of loss of nationality: This certificate will be mailed to you, usually within a few months.
  7. File final tax returns: File your final tax return with the IRS as well as Form 8854.

How much does it cost to renounce US citizenship?

The US Department of State charges a fee of $2,350 for the administrative process of renouncing citizenship.

This fee is among the highest in the world and does not include any additional costs you might incur for legal or financial advisory services.

Moreover, if you are classified as a covered expatriate, the financial implications can be even more substantial due to the Exit Tax.

Tax implications of renouncing US citizenship

The exit tax

A critical component for expats to consider when renouncing US citizenship is the Exit Tax.

Essentially, it is a tax on the net unrealized gain on your worldwide assets as if you sold them the day before expatriation.

This tax applies to individuals who meet any of the following criteria:

  • Average annual net income tax for the five years ending before the date of expatriation exceeds a specified threshold amount.
  • Net worth is $2 million or more on the date of expatriation.
  • Failure to certify compliance with US tax obligations for the five years preceding expatriation.

Covered expatriate status

If you meet any of the criteria mentioned above, you are considered a 'Covered Expatriate', and the Exit Tax applies to you.

It is essential to plan carefully and assess your assets and liabilities to understand the potential tax hit.

FATCA and reporting obligations

The Foreign Account Tax Compliance Act (FATCA) requires US citizens to report foreign-held assets to the IRS.

Renouncing your citizenship can free you from the ongoing reporting burdens under FATCA.

However, remember that your final year as a US citizen will still be subject to these reporting requirements.

Planning and pre-renunciation steps

  1. Evaluate your reasons: Consider whether your reasons for renunciation align with your long-term goals and values.
  2. Assess your financial situation: Engage a tax professional to conduct an assessment of your financial situation and calculate potential tax liabilities.
  3. Consult an immigration lawyer: Understand the legalities and consequences associated with renunciation.
  4. Secure citizenship elsewhere: Before you renounce US citizenship, make sure you have citizenship in another country to avoid becoming stateless.
  5. Compliance with US tax obligations: Ensure you are compliant with all US tax obligations for the five years preceding expatriation.
  6. Collect necessary documents: Gather documents needed for the renunciation process, such as your US passport, naturalization certificate (if applicable), and evidence of other citizenship.

Post-renunciation: Final tax return

After renouncing your US citizenship, you are required to file a final tax return as a US citizen.

This return is known as the dual-status tax return, and it should be filed by April 15th of the year following your renunciation.

Form 8854

As part of your final tax return, you must also file Form 8854, Initial and Annual Expatriation Statement, with the IRS. This form is critical as it serves as your notice to the IRS that you have renounced your US citizenship and determines whether you owe any exit tax.

Future US investments

After renunciation, any investments you have in the US are treated as if owned by a non-resident alien. As a result, dividends and interest could be subject to withholding tax.

You should consult a tax pro to understand how your investments will be impacted.

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Re-entry into the United States

After renouncing US citizenship, your ability to enter the US will be like any other foreign national. You will need the appropriate visa for travel and staying in the US.

Moreover, under the Immigration and Nationality Act (Section 212(a)(10)(E)), individuals who renounce citizenship for tax purposes can be deemed inadmissible to the United States.

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.

The bottom line

Renouncing US citizenship is an irreversible and complex process with significant financial, tax, and legal implications.

Plan thoroughly, seek the counsel of experienced professionals, and make sure to understand both the legal and financial consequences.

For more information on tax considerations for expats, Taxes for Expats offers a wealth of resources and services.

"Renouncing one’s US citizenship should not be based on a whim. It’s essential to analyze the financial and non-financial aspects of such a decision."  -  Dr. Clarisse Landry, International Tax Consultant.

Ines Zemelman, EA
Founder of TFX