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“Dual citizen exemption” encourages dual citizens from birth to remain US citizens



Ted Cruz was born in 1971 in Canada. He was therefore born a Canadian citizen. He claims to have been born to a U.S. citizen mother and was therefore a U.S. citizen by birth. (Whether he qualifies as a “natural born citizen” is a different question.) As a Canadian citizen he had the right (prior to renouncing Canadian citizenship) to live in Canada. Had Mr. Cruz, moved back to Canada, he could have avoided the U.S. S. 877A Exit Tax. Incredible but true. It will be interesting to see whether Mr. Cruz regrets renouncing his Canadian citizenship. As you will see, by renouncing Canadian citizenship, Mr. Cruz surrendered is right to avoid the United States S. 877A Exit Tax.

Here is why …

The S. 877A Exit Tax rules in the Internal Revenue Code, are the most punitive in relation to U.S. citizens living outside the United States (AKA Americans abroad). To put it simply, with respect to Americans abroad, the S. 877A Exit Tax rules:

– operate to confiscate assets that are located in other nations; and

– operate to confiscate assets that were acquired by U.S. citizens after they moved from the United States.

There is not and has never been an “Exit Tax” anywhere else that operates in this way. The application of the S. 877A Exit Tax to assets located in other nations, is both an example of “American Exceptionalism” at its finest and a strong deterrent to exercising the right of expatriation granted in the “Expatriation Act of 1868“.

But, the “Exit Tax” applies ONLY to “Covered Expatriates” and “dual citizens from birth” can avoid being “Covered Expatriates” …

As has been previously discussed, the Exit Tax applies ONLY to “covered expatriates“. There are two statutory defenses to becoming a “covered expatriate”. This post is to discuss the “dual citizen from birth” defense to being treated as a “covered expatriate”. I have discovered that this defense is NOT as well known or understood as it should be.

The statute granting the “dual citizen from birth” defense to “Covered Expatriate” status reads as follows:

(g) Definitions and special rules relating to expatriation

For purposes of this section—

(1) Covered expatriate

(A) In general

The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2). (JOHN RICHARDSON NOTE: THIS MEANS THAT THE PERSON HAS MET ANY OF THE INCOME TEST, ASSET TEST OR COMPLIANCE TEST.)

(B) Exceptions

An individual shall not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) (JOHN RICHARDSON NOTE: ONE MUST STILL MEET THE 5 YEAR TAX COMPLIANCE TEST TO AVOID BEING A COVERED EXPATRIATE) if—
(i) the individual—
(I) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(II) has been a resident of the United States (as defined in section 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs, or

Okay, it’s not quite as simple as it looks. Here are the requirements:

(1) Became “at birth” a citizen of the United States AND a citizen of another country

This means that one was born in the United States and acquired dual citizenship from your parents or you were born outside the United States to American(s) abroad.

(2) As of the expatriation date (the date you relinquished U.S. citizenship you continued to be a citizen of THAT specific country that you acquired dual citizenship from birth.

(3) You are taxed “as a resident” of the country referred to in paragraph (2) above.

Note that this says “taxed as a resident”. Does that you mean that you must reside in that country? What if the country does NOT impose taxes on its residents?

(4) Has not been a U.S. resident (as defined in the Internal Revenue Code) for not more than 10 of the last 15 years.

This means that the person has NOT met the requirements of the “substantial presence test” which is described as follows:

substantialpresencetest

This is a punishment for NOT having been born a “dual citizen”

Here is why.

In the current environment of FATCA, FBAR, CBT, PFIC, OVDP, Streamlined, Foreign Trusts, etc., the vast majority of Americans abroad:

A. Are finding it very difficult to exist as a U.S. tax compliant U.S. citizen abroad. Those Americans abroad who are compliant with U.S. tax laws have agreed to live life under extreme disability. See: “How To Live Outside The United States In An FBAR and FATCA World“. Remember that “When an American is in Rome, that American must live as a Homelander”.

B. Are feeling that they are forced to renounce their U.S. citizenship. (See the series of posts by Rachel Heller where she discusses her “renunciation” experience. Of particular interest is her post 5 – “The Irony Of Renouncing Under Duress” – where she addresses the issue of whether her renunciation really was voluntary.)

Those Americans abroad who were NOT born “dual citizens” will be subject to the Exit Tax if they become “covered expatriates”. Therefore, they are under pressure to BOTH renounce U.S. citizenship and to renounce before they become “covered expatriates”. In other words, they must “get out now!”

Those Americans abroad who WERE born dual citizens, do have to deal with the compliance problems but do NOT have to fear becoming a covered expatriate (assuming that they meet the “U.S. tax compliance test).

Therefore, it is easier for those who are “dual citizens from birth” to remain U.S. citizens (for at least a longer period of time). This post has been partly motivated by the interesting discussion by a young woman in the UK who was born a dual U.S./U.K. citizen who is dealing with her discovery that she must file U.S. taxes.

Think of it:

S. 877A of the Internal Revenue Code is most punitive with respect to American citizens who where NOT also born citizens of another nation. As I have repeatedly said, when it comes to this kind of injustice:

#youcantmakethisup

By the way, if you would like to see the brutality of the Exit Tax in action and how it discriminates against those who were NOT born dual citizens, read these examples of “The S. 877A Exit Tax In Action – 5 Examples (including the effect on those who were NOT born as dual citizens”).

Conclusion …

Those who were born dual citizens may have “won the birth lottery”! But, Ted Cruz doesn’t seem to have realized this.

John Richardson

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.

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One thought on ““Dual citizen exemption” encourages dual citizens from birth to remain US citizens

  1. Will says:

    Thank you for your time and for sharing your knowledge!! I have so many questions I would love to ask but I will stay focused on the one related to the article above.

    Could you please clarify the statement, “(4) Has not been a U.S. resident (as defined in the Internal Revenue Code) for not more than 10 of the last 15 years.”? The double negative is a bit confusing.

    If a person was born in the US to foreign parents and became a dual citizen @ birth but left the US to live [and (3)be taxed] for longer than 15 years, are they then at risk of being a “covered expat” because they do not meet all 4 of the criteria? forget “at risk”, maybe they would definitely become a “covered expat” upon renunciation because they do not meet all 4 of the criteria?

    Thanks again!

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