A survey by Expat US Tax reported that 1 in 4 American expatriates are carefully considering or planning to renounce their US citizenship.
But, the statistics show the amount of people giving up their citizenship is reducing. How can that be?
Well, to understand the numbers you need a little context. When the Trump Administration came to power, they were tasked with reducing the renunciation numbers… it doesn’t look good when citizens actively want to give back their citizenship to such a great country. Instead of listening to the real reasons and bringing real change, they took a shortcut and simply forced embassies around the world to only allow thirty renunciation appointments per month.
So yes, the numbers went down, but the queue was going around the block!
Then Covid came, so the numbers reduced significantly.
Many US embassies around the world now have waiting times greater than 12 months.
DOUBLE TAXATION
Tax treaties can help with double taxation, but they don’t cover everything. Selling your home in the UK, Australia, and many other countries can carry a large US capital gains tax bill with it.
Technically it’s not double taxation, because tax isn’t being paid to the resident government, but governments fill their coffers in other ways, so effectively, it acts as an indirect double tax.
Former UK Prime Minister Boris Johnson was a UK-US dual citizen. Even though he left the US at age 5, the IRS came knocking on his door almost 50 years later, asking for Captial Gains Tax to be paid on the sale of his London flat.
The following year, Boris renounced his US citizenship… some may say the horse had already bolted, but he’s certainly saved himself from future US tax pain on his UK assets.
EXPENSIVE FEES
Only a few years ago, the admin fee to renounce US citizenship was $400. That fee is now $2,350 and could go beyond $5,000 in the coming years. There has been recent news that the fee may be reduced closer to the original $400. Watch this space.
FINANCIAL FREEDOM
Investing for your future outside of the US can be an expensive ordeal due to heavy restrictions, tax compliance costs, and additional taxes. The US tax system is designed to encourage taxpayers to invest their savings in the United States and penalizes them for investing outside the US.
A simple retirement account in many countries can become a nightmare for those that aren’t well-versed in the ins and outs of US tax compliance.
Of course, with good tax planning, most assets can be protected and run efficiently.
WHY DO U.S. CITIZENS LIVING ABROAD HAVE TO FILE U.S. TAXES ANYWAY?
In very simple terms, it’s United States law.
All US citizens, regardless of where they live, have to report their worldwide income every year by filing a US tax return.
The US is one of only two countries in the world where the taxation system is based on citizenship.
Almost every other country is residency-based, and this leads to a rise in confusion over filing US tax returns and obligations once you’ve moved abroad.
What happens when you renounce U.S. Citizenship?
· Unsurprisingly, you will lose absolutely all rights of citizenship and you can’t citizenship back.
· It is vital to possess dual nationality if you intend on renouncing your U.S. citizenship; otherwise, you may lose the protection of any government upon renunciation. You will not be entitled to the security of the United States overseas.
· You can’t vote in U.S. elections.
· Children born after renunciation will not be able to receive U.S. citizenship from you unless they are born there.
· You can travel to the United States with a Visa like many any other non-US citizens can.
· Getting a work visa in the United States could be very difficult, but not impossible.
Benefits of Renouncing U.S. Citizenship
Let’s start with the big one and perhaps the only one. It’s getting out of the US tax system. For most people that means saving anywhere from $300 to $3,000 per year on US tax preparation.
It could also mean massive savings when selling your home in many countries because you won’t have to pay Capital Gains Tax.
It’s not just capital gains on houses either, it’s capital gains on stocks, such as those found in a UK Stocks & Shares ISA account.
A second benefit is being free to invest in your main country of residence without fear, and take advantage of local tax-free or tax-preferred savings accounts and pensions.
How to Renounce U.S. Citizenship?
JOB ONE – GETTING OUT OF CITIZENSHIP
Job one is to contact your local US embassy and join the renunciation queue. Keep in mind you can use any US embassy in the world for this process.
You don’t need to have all your US taxes in line before booking or attending your appointment at a US embassy. Some tax firms will tell you that you do and it’s simply not true.
You won’t get asked a single question about US tax compliance when you attend your embassy appointment, and when asked why you’re giving up US citizenship, it’s best not to mention the tax elephant in the room either.
You’ll need to pay US$2,350 while you’re there and most embassies accept credit cards.
You’ll be asked to complete and sign Form DS-4079: Request to Ascertain Possible Loss of United States Citizenship. You must sign this form in front of an embassy officer, so don’t go along to your appointment with it already signed.
You’ll need ID. Proof that you’re a U.S. Citizen. US passports and birth certificates are ideal. Check with your US embassy about what they want from you on the day.
You’ll need to take all current international passports.
If applicable, U.S. consular report of birth overseas, Naturalization certificates for any country including the U.S., as well as evidence of any name changes as a result of marriage, divorce, court order, etc.
All the supporting documents will be handed over to the Department of State in Washington, D.C., for evaluation. This procedure can take 2-6 months, and the Consulate will contact you when your loss of nationality is determined.
JOB TWO – GETTING OUT OF THE U.S. TAX SYSTEM
This second step is making sure you are clear on the tax side of things. This involves a few specific steps that you must complete to let the IRS know you have given up your citizenship and you’re exiting the US tax system.
Typically, you need the last five years of tax returns filed with the IRS, and then a final tax return plus Form 8854 (Dual Status Return) filed the year after you’ve renounced citizenship.
For example, if the date on your Certificate of Loss of Nationality was June 10, 2023, then your 2023 tax return would present your tax information from Jan 1, 2023, through to June 10, 2023.
That tax return would be filed in 2024.
The process is different depending on how much you’re worth and how much US tax you’ve paid over the past five years.
Read on to learn about covered expatriates and non-covered expatriates and why one of these types can equal a huge Exit Tax bill on your way out of the US tax system.
Payment of Exit Tax
There are two types of expatriates, covered expatriates and non-covered expatriates. Only covered expatriates are subject to laws surrounding exit tax.
You’ll be considered a covered expatriate if you meet any one of these three tests: the certification test, the tax liability test, and the net worth test.
The Certification Test:
You must sign a legally binding document that states you’ve fully US tax compliant for the purposes of renouncing citizenship. It means your last 5 years of tax returns have been filed. If you don’t, you’ll be considered a covered expatriate.
The Tax Liability Test:
You are also considered a covered expatriate if your average annual net tax liability for the last five years is more than $178,000.
The Net Worth Test:
Imagine selling everything you own in the whole world the day before you renounce your citizenship… when you count up all your money from the big yard sale, if you’ve got more than $2,000,000 you’ll be considered a covered expatriate.
If you’re on the hook for the Net Worth Test but you do not want to be considered a covered expatriate, you can hire a specialist US tax specialist to help you to move your money and assets around, using methods such as strategic gifting, which may help you to reduce the value of your assets below the $2 million threshold.
Renouncing without a Social Security Number.
It’s true, most people can get tax compliant without an SSN. There is a special IRS program called the Relief Procedure which is designed specifically for US citizens that have lived in another country for most of, if not all of their life.
This is the only method of exiting the US tax system without an SSN at the time of writing.
Always get professional help when it comes to your US tax compliance.
Company name: Expat Tax Online
Contact person name: Clark Stott
Email: [email protected]
YORK
Blake House
18 Blake Street, York
YO1 8QG, United Kingdom
Tel: +44 (0) 1904 211 005
