US Expats Renouncing American Citizenship – What You Need to Know

Americans living abroad are still required to file a US tax return, reporting their worldwide income, as well as obey the tax rules in the country where they live.

Many US expat have settled abroad permanently though, and they justifiably wonder why they must continue filing a US tax return every year, even if they don’t pay any US taxes because they claim one or more of the exemptions available to expats, such as the Foreign Earned Income Exclusion or the Foreign Tax Credit, when they file.

As a result, many US expats consider renouncing their American citizenship.

While it’s been widely reported that the numbers of Americans renouncing their US citizenship has risen dramatically over the last few years, the numbers are in fact actually relatively small, at several thousand a year.

This may be because the process isn’t straightforward, and there’s a hefty fee to pay to expatriate too, currently $2,350. On top of this fee, wealthier Americans, as well as those who aren’t up to date with their US tax filing, may also have to pay an exit or expatriation tax, calculated as a percentage of their net worth.

Form 8854 is a filing requirement for expatriating Americans that allows the IRS to determine whether or not to levy this tax.

Think Carefully

Renouncing US citizenship is a serious decision, and all the pros and cons should be carefully weighed up before a final decision is taken.

For example, although expatriating lets US expats no longer to have to file US taxes, it may also hinder their ability to visit friends and relatives in the US, which they will subsequently have to do as a foreign national.

There is also the exit fee and potentially the exit tax to consider, which may make the cost and hassle of annual US filing seem more daunting.

Another factor may be estate tax liability on US assets, as estate tax is applied to much lower values of assets for non-US citizens.

If you do decide that renouncing your US citizenship is the right course though, here’s how to go about it.

How To Renounce US Citizenship

The first point to mention is that before you can renounce US citizenship, first you have to be a citizen of another country, so if you aren’t already a foreign citizen, you will have to become one.

Secondly, you will need to ensure that you are up to date with your US tax filing for the last 5 years, including FBAR filing, as otherwise you will be liable for an exit tax on your assets as well as an exit fee.

If you meet these two conditions, then the next step is to contact your nearest US embassy or consulate to make an appointment with them. They will provide you with the paperwork you need, ensure that you understand the consequences of renouncing US citizenship, and interview you to ensure that your choice is definitely voluntary.

Form 8854

Form 8854 must be filed along with your final US expat tax return.

It is used to determine whether you will be considered a ‘covered expatriate’, and so subject to an expatriation tax.

This exit tax will be applied if:

1. your net worth is over $2m;

2. your average tax liability (i.e. how much tax you owed) for the last 5 years was over around $160,000 (the figure is adjusted up a little for inflation each year); or

3. you haven’t fulfilled all yours US tax filing obligations for the last 5 years

Form 8854 also requests information including what assets you have and how much they’re worth, how you became a US citizen, how much time you spend in the US, and what other citizenship’s you hold.

Catching Up  

We are specialists at helping US expats catch up with their US tax filing, a requirement before renouncing US citizenship for expats wishing to avoid paying an expatriation tax, using the Streamlined Procedure and OVDP IRS amnesty programs. If you require any assistance catching up with your US expat tax filing or renouncing your US citizenship, get in touch and we’ll be happy to help out.

Have a question? Contact Katelynn Minott

Your comments are welcome!

With clients in over 150 countries, Bright!Tax is a leading provider of US tax services to the estimated 9 million Americans living abroad. I’m responsible for client experience, communications, and branding. Since I joined, turnover has been growing at a rate of 80% per annum.

I excel at surpassing competition by disrupting and transforming the playing field through innovation.

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1 comment on “US Expats Renouncing American Citizenship – What You Need to Know”

  • You include as as a requirement to renounce the advice that:

    “Secondly, you will need to ensure that you are up to date with your US tax filing for the last 5 years, including FBAR filing, as otherwise you will be liable for an exit tax on your assets as well as an exit fee.”

    – FBAR compliance is not a requirement to avoid “covered expatriate” status. The 5 year certification test specifically applies to Title 26. FBAR is Title 31.

    – Not all “covered expatriates” will actually pay an Exit Tax. Their individual situations may be such that “running the Exit Tax rules” will result in no Exit Tax owing.

    No two situations are the same.

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