If you are one of those U.S. citizens who have a long-term commitment in another country and feel that you need to renounce your U.S. citizenship, then you must ensure that you handle the process properly, especially your tax requirements.
Rose-ann is a tax professional with particular experience in the renunciation process, she helps to clarify some issues concerning the renunciation process so you can make an informed decision. Here you will find out about the renunciation process, what a covered expatriate is and about the exit tax which may be required if you are to finally become a non-U.S. tax resident.
What steps are needed to start the renunciation process?
Renouncing requires two simple steps, immigration and tax compliance. The process is started by sending the U.S. Consulate (or embassy) nearest to you an email. Someone from the Consulate will then contact you shortly to inform you about the process and information that you will need to gather. They will also forward the Department of State forms to you; these need to be completed for the process to start.
How does the immigration process proceed?
Renunciation of U.S. citizenship is an irrevocable process, and the Consulate will need to ensure that you understand the implications and that you have not been forced into deciding. Therefore, expect to get a phone call from them to confirm that you are sure about your decision and that you understand the consequences. At this point you will be given an appointment date to appear at the Consulate.
Renouncing–Getting your non-resident status
Expect to be interviewed by an officer of the consulate at your appointment. This meeting is not an interrogation, but a reassurance for them that you are aware of the repercussions, and you have not been coerced into making it. At this point you also sign the Department of State forms that you have prepared and on the date that these forms are signed is the date that you are officially an expatriate, even though the process takes a further 4 – 6 weeks to complete. From the date of your signature, you are only liable for tax in the U.S. on any income that you may have there. You are now a non-resident alien and no longer considered an American citizen.
I want more information about renouncing my U.S. citizenship
What is the cost of renouncing your citizenship?
On the day that you sign the Department of State forms, you are required to pay US$2,350, which is an administration fee. It is paid at the embassy with the submission of your paperwork. This recent increase of $400 is steep! Unfortunately, it is expected to increase in the foreseeable future again.
How to meet the tax compliance requirements
An important step in the renunciation process is to finalize all your tax affairs. Rose-ann takes us through the simple steps required.
Prepare a dual-status tax return
The final tax return is known as the dual-status return and has to be filed for the year you renounce. It will be due by June 15 of the following year and all income earned until the date that you signed your renunciation papers must be declared there. You also have to declare your income as a non-resident alien for the rest of the year, but you will only be taxed on the income from U.S. sources. U.S. taxpayers living abroad can file their returns two months later, but all taxes are due by April 15, otherwise penalties and interest can accrue.
Submit an Expatriation Statement
This is also known as Form 8854 and has to be submitted with the dual-status tax return by everyone that is renouncing their American citizenship. In it, you must include a summary of your net worth and one of your tax liabilities for the last five years, not including the current one. In the summary of your net worth, you must include any gains subject to exit tax for covered expatriates.
Who pays exit tax?
Anyone who meets any of the following three tests, making them a covered expatriate, must pay an exit tax.
Can you overcome the hurdle of having failed to submit tax returns for five years before renunciation?
The consequences of not having submitted tax returns for five years prior to renunciation can be costly. The IRS charges an exit tax on the amount that a deemed sale of all your assets would fetch. This is worked out at a fair market value.
Imagine selling everything you own the day before you renounce your citizenship (at market value). Exit tax is calculated on your assets, as if you’d sold them.
However, if you want to avoid being a covered expatriate, you can prepare by filing tax returns for the last five years before submitting your dual-status return.
These are the three tests that will deem you to be a “Covered Expatriate”
- If your average annual tax liability has exceeded $172,000 (for 2021) then you meet the tax liability test.
- If the value of your property, cash holdings, retirement funds, trust membership or any other investments is $2 million or more then you meet the net worth test. Remember, this includes money that you may receive at a future date from the country you now reside in (e.g. retirement funds) in and only the equity of a mortgaged property is calculated into the net worth.
- Any taxpayer who does not certify in a Form 8854 that they have complied with all Federal tax obligations for the preceding 5 years is immediately considered a covered expatriate and this is known as the certification test.
How else can the exit tax requirements be overcome?
If you want to minimize your net worth to avoid paying exit tax, you need to know that as a U.S. citizen, you can gift assets to others to the value of $11.7 million (threshold for 2021) in your lifetime.
Rose-ann advises that anyone who wants to start the renunciation process must first prepare by checking their net worth. It is important that this is calculated correctly by a professional, so you don’t over- or under-estimate it.
Contact an experienced tax specialist before even contemplating renunciation and get advice on what the tax implications are for you.