Renouncing your U.S. citizenship is a purposely complicated process that intimidates many people from completing the process. At Expat US Tax, we can assure you that renouncing your U.S. citizenship is not as complicated as it may seem. With enough strategy and planning, you can successfully renounce your U.S. citizenship and be free of headaches every time U.S. tax season rolls around.
American citizens decide to renounce their citizenship for a variety of reasons. You can read the stories of other clients who successfully renounced their citizenship here.
For those who are interested in renouncing but confused about the finer details of the process, Khandra, a senior manager at Expat US Tax, is here to answer all of your questions. Khandra has been working with expats for more than 15 years and is here to shed some light on the tax side of renouncing your citizenship.
How does expatriation work from a tax perspective?
There’s really a two part process to expatriation. The first part is from an immigration status, where you schedule an interview with the U.S. Consulate and formally renounce your citizenship.
The second step is from a taxation perspective. There are a few specific steps that you must complete to let the IRS know you have given up your citizenship.
Here’s what you need to do:
- Ensure you have a 5-year filing history and that you did not pay more than about $150K in taxes across those years. This number can change a bit from inflation.
- Prepare a tax return for the year of your expatriation. This would result in 6 total years of tax filing.
- Calculate your net worth. If it’s under $2 million, the process is pretty straightforward. If it’s over, you may have to pay an exit tax, but there are legal strategies to help reduce your assets.
What is a simple way to work out your net worth?
Take inventory of your current assets. You may not have exact dollar figures but you can ballpark it. Consider everything including the following:
- retirement accounts
- household goods
- investment portfolios
Make sure you include everything you have both inside and outside of the U.S., including. The goal here is to create a worldwide picture of your net worth to figure out if you may have to pay the exit tax.
I want more information about renouncing my U.S. citizenship
If I add up my net worth and it over the $2 million mark, how can I avoid paying the exit tax?
The exit tax is certainly avoidable, but it does require some up-front planning. For example, if you’ve already visited the consulate to formally renounce, you’re probably too late. However, with enough foresight, we can help you find a way to make this work. One of the best ways to do this is by gifting. Currently, an American can gift up to $11 million in assets. This is ideal if you have a spouse, relatives, or children that are non-Americans.
Whatever you decide, make sure you allow enough time and work with a reliable tax expert to plan the right strategy for you.
Do I file a tax return in the year I renounce my citizen?
Yes. This is very important. You must follow a dual-status tax return the year you expatriate. You will fill out an 8854 Form, which is basically a checklist that ensures you have the items listed previously (5 years of tax filling, asset estimate, etc…)
What if I renounce on the 1st of March 2020? When do I file?
You would only be tax eligible from the 1st of January to the 1st of March. However, the tax form covers the full year so you would not follow until the following year, like you would with a normal tax return.
What happens if I renounce my citizenship at the embassy but forget to do the tax stuff?
If you haven’t taken care of your taxes and just renounce your citizenship, you will not be able to certify that you’ve dutifully completed 5 years of tax returns.
If you fail to file, you will automatically fall into the category of a “covered expatriate.” This can involve bad consequences from a tax perspective. If the IRS catches on, you will have to pay an exit tax.
Many governments have signed information sharing agreements with the U.S. which would make it tough to financially operate in your new home country.
What does the exit tax look like?
If you are considered a “covered expatriate” because you failed anything on the 8854 OR if your net worth is more than $2 million, you will have to pay an exit tax. The exit tax is pretty brutal. Essentially, you’re taxed on every asset you owned, which is called a “Mark to Market” tax. The IRS will expect you to pay them even if you don’t have the cash to do it.
What if I’m a Dual National? Does the process affect me differently?
If you’re born a Dual National and still reside in the non-U.S. country, you do not have to worry about the $2 million net worth tax.
What happens to my social security after I’ve renounced my citizenship?
Your social security benefits are not related to citizenship as long as there is a totalization agreement between the U.S. and your new country. Under this agreement, the two countries will work together to harmonize your retirement benefits.
What if I live in a country that does not have a totalization agreement with the U.S.?
You can still receive your social security if you meet the requirements. This usually means you have worked a full 40 quarters in the U.S. However, if you live in certain countries, such as Cuba, the U.S. would not be allowed to send your social security to a local, Cuban bank account.
What’s the difference between renouncing and relinquishing your citizenship?
Someone who relinquishes their citizenship has done something specific to warrant it. The U.S. State Department website has a whole list of what qualifies for relinquishing, including serving in another country’s military or making a donation to a terrorist organization. We obviously don’t recommend going down this path. It’s better to go the thoughtful and legal route, which is to renounce.
Can I go back to the U.S. after my expatriation?
Overall, yes, depending on the country from which you’re coming. Speak to an immigration attorney or double-check the travel requirements beforehand.
Renouncing your U.S. citizenship is a significant decision. If you need help catching up on your U.S. taxes or need a qualified expert to guide you through the expatriation process, visit our website for more information. You can also find a free renunciation guide to help you get started.