A Guide to Tax Implications of Renouncing US Citizenship

renouncing us citizenship taxes

Under Section 349(a)(5) of the Immigration and Nationality Act (INA), a U.S. citizen may renounce his or her citizenship by signing an oath of renunciation or by voluntarily; where they can make a formal renunciation of nationality before a U.S. diplomatic or consular officer outside the United States. 

As complex as it may sound, renunciation of citizenship isn’t something that you want to decide abruptly. In fact, it is one of the most solemn decisions anyone can make. With that, you must consider certain factors, such as lengthy process, extensive paperwork, fees, interviews, and tax implications before you decide. 

What is the Process for Renouncing Your US Citizenship?

When you have decided to renounce your U.S. citizenship, one of the things you should do is to meet either a consul or embassy representative. Such a representative will give you insights into the repercussions of renouncing U.S. citizenship. From there, you will need to gather all the requirements needed including the documents that will be submitted to the Internal revenue Services (IRS). 

In complying with the IRS requirements, you must file and fill out Form 8854. On top of that, you must make sure that your income tax filing is updated (it is applied to both permanent residents and those who acquired citizenship). Moreover, there are five basic steps to renounce U.S. citizenship. Here are the following:

  1. Speak to a U.S. immigration lawyer. While you have the right to renounce your U.S. citizenship, this process can be complicated and time-consuming. Thus, it is essential to understand what renunciation means and how it will affect you and your family. Though you may be motivated by philosophical differences and tax benefits, you should ensure that renunciation is the best thing for you. Thus, you should think about it and weigh the downsides vs. its benefits, since renunciation is irrevocable. With that in mind, speaking to an experienced U.S. immigration lawyer is crucial before proceeding. It can cost up to $2,350 in filing fees to renounce US citizenship.
  2. Determine your new home. When you want to renounce your U.S. citizenship, you must file it at a consular office outside the United States. Even though choosing a consular office located in your new home country isn’t compulsory, most individuals opt to do so out of convenience. Moreover, it is highly recommended that you acquire legal status in your new home country when you have decided to renounce your U.S. citizenship. By doing so, you won’t become stateless during renunciation. 
  3. Prepare U.S. Renunciation Forms. Before your renunciation appointment, you have to prepare and fill out Form DS- 4079 (Request for Determination of Possible Loss of United States Citizenship). In addition to that, State Department will also use several forms to process your renunciation such as DS-4080 ( oath of renunciation of the Nationality of the United States), DS-4081 (Statement of Understanding Concerning the Consequences and Ramifications of relinquishment or Renunciation of U.S citizenship), DS-4082 (Witnesses’ Attestation Renunciation/Relinquishment of Citizenship), and DS-4083 (Certificate of the nationality of the United States. 
  4. Set a Schedule and Attend Renunciation Appointment. As mentioned earlier, it is not necessary to choose a consular office in your new home country when filing for renunciation. However, it is probably more convenient to schedule an appointment within your new state so you don’t have to travel outside your country of residency. Moreover, you have to bring with you your U.S. passport, new passport, birth certificate, and other identification along with the DS-4079, when attending the renunciation appointment. At the end of your appointment, you will be given DS-4083 as physical proof that you have completed the renunciation process. 
  5. Prepare a Final U.S. tax Return. After processing the renunciation of .your U.S. citizenship, you will need to settle your tax obligation with the United States. As such, your last tax return will be from January 1 through the day you expatriate. On top of the final tax return, filing for IRS Form 8854 (Expatriation Information Statement) is also needed. 

How Long Does it Take to Renounce U.S. Citizenship?

When you have decided to renounce your U.S. citizenship, you should expect a lengthy process and significant waiting time. Since your loss of Nationality application and other necessary documents will be forwarded to the Department of State for consideration and adjudication, it will take some time — between 3-6 months — before you’ll get the result of renouncing your citizenship.  

As such, all your U.S. citizenship files will be retained until your Loss of nationality application is adjudicated by the Department of State. During such time, the consulate will reach out to you with their determination. 

What are the Benefits of Renouncing Your US Citizenship?

Renouncing U.S. citizenship is a lengthy process. However, with the increasing frustration over FATCA and U.S. taxes, it is understandable why a lot of U.S. ex-pats decide to renounce their citizenship despite the long procedure. As such, when your US citizenship has been renounced, your tax burden will be significantly reduced and you’ll no longer be paying tax on your worldwide income.  

However,  you’ll still need to have tax payments on your business inside the United States. But from the date of your expatriation, you’ll become an alien and no longer be required to file taxes as a US citizen. It means that renouncing citizenship will reduce the monetary burden of taxation where you’ll no longer be required to fill out Form 5471 for foreign companies, file a US tax return, or report your bank accounts with the FBAR form. However, even if you renounce, you will still be responsible for U.S. tax if you meet the substantial presence test.

You should also know that there’s a difference between the FBAR vs 8938. If you are a dual-status alien and not ready to renounce you citizenship, remember to keep filing returns as usual.

how long do you owe taxes after renouncing your us citizenship

What’s the Fee for Renouncing your US Citizenship?

The renunciation of your U.S. citizenship alone will cost you $2,350. On top of that, during the process, you have to travel at least once to the U.S. consulate to take the interview and the renunciation oath. When it comes to tax matters, you have to pay back your past taxes if ever you are not been tax compliant for the past 5 years. 

Plus, you will also have to include exit tax on the overall cost if you have met the criteria for such tax implication. Furthermore, you will also have to pay for acquiring second citizenship in your new home country if you don’t want to be at risk of becoming stateless. 

Tax Implications

Renunciation has numerous implications, including financial, political, and legal, just to name a few. Not to be ignored are the tax implications you have to face when you renounce your U.S. citizenship, which often disappears off the radar during the entire process. 

Yes, that’s right! Even though renunciation of U.S citizenship may sound alluring, it doesn’t come without its own set of tax rules and considerations based on tax law. With this, the Heroes Earnings Assistance and Relief Tax Act (HEART Act) of 2008 dramatically revised the tax consequences related to the renunciation of U.S citizenship in two essential ways. These are:

  • The introduction of the exit tax. This change applies upon the termination of long-term permanent residency, which is called “covered expatriate or the renunciation of citizenship. 
  • The introduction of the Section 2801 tax. This change applies to gifts from a covered expatriate.  

Here are the following tax implications you may encounter once you renounce your U.S. citizenship.  

Exit Tax

The exit tax applies to both green card holders (who relinquish their green cards) and covered expatriates (who relinquish their citizenship). This tax is on the built-in appreciation in the properties of an expatriate as if it had been sold for its fair market value on the day prior to expatriation. Where it has a current maximum capital gains rate of 23.8%, which includes the 3.8% net investment income tax and 20% capital gains tax.

Furthermore, exit tax will be triggered if any of the following are true: 

  • Your annual net income tax for 5 years until the date of expatriation is beyond the specified amount which is $171,000 (for 2020) and will be adjusted for inflation; 
  • You have failed to certify on Form 8854 which is proof that you have complied with all the U.S. federal tax obligations for 5 years before the date of the termination of your residency or expatriation. 
  • Your net worth is $2,000,000 or more at the time of your termination or expatriation.

If you have failed any of the above criteria, you will be designated as a covered expatriate by the Internal Revenue Code (IRC). In this case, you will be subject to the exit tax on the net unrealized profit in your property as if it had been sold for its fair market value on the day preceding the expatriation date. 

Past taxes 

A taxpayer who has delinquent tax debt should consider applying for an IRS tax amnesty program. It is a wise step to clear past taxes and keep the IRS penalties at bay before renouncing U.S. citizenship. The U.S. expats may avail of the Streamlined Filing Compliance Procedure if they fail to file taxes on time due to non-willful conduct. 

According to this tax amnesty program, the taxpayer is required to file three (3) years of tax returns, and six (6) years of Foreign Bank and Financial Accounts (FBAR). A delinquent U.S expatriate who complies with this process should pay for their past taxes with corresponding interest. However, these individuals are not subject to face any penalties. 

The IRS can (and will) revoke or deny your passport for unpaid tax.

Estate Tax

Generally, the estate tax implication can be applied to all property under the name of a U.S. citizen and to a U.S. property owned by a non-U.S. citizen. While renunciation of U.S. citizenship may protect non-U.S. properties and assets from estate tax exposure, it can greatly increase the exposure of U.S. assets owned at death, such as U.S. stocks and real estate. 

Why? It is because a U.S. citizen can protect $11.8 million of properties and assets from the estate tax while a non-U.S. citizen can only shield $60,000 of U.S. properties and assets from such tax implications. The cost of this often unforeseen tax can be significantly high because of the estate tax rate, which has a maximum rate of 40%. 

Social Security and Retirement Payments After Renunciation

After you have successfully renounced your U.S. citizenship, you are still eligible for Social Security — only if you are qualified with enough credit. Plus, you can still receive and enjoy 401K and your retirement income. But, these are all subject to US tax. However, military pension benefits are revoked when an ex-pat has left the United States and is being called out of the active military role as a non-citizen. Here, you might be required to file the 1040NR return — except if you have been offered automatic withholdings. 

Furthermore, the expelled individual doesn’t have any reason to do so, except to report international income tax and pay tax obligations. For any changes, you must let the IRS officials know through IRS form 8854, then file the copies with the Department of the treasury. If you fail to file Form 8854, this only means that you are considered subject to an exit tax, which results in being audited. This rule is not only applicable to covered expatriates, but also to those who are green card holders who will need to file such a form within 30 days of you leaving the U.S.

Can I Renounce My U.S. Citizenship to Avoid Taxes?

Renouncing U.S. citizenship doesn’t free you from tax obligations. Yes, that’s right! it is one of the facts about this process. Even after the renunciation, the IRS could still assess and audit penalties and taxes. As such, you are subject to Exit Tax if you meet the following criteria:

  • If your average yearly income tax liability is more than $162,000.
  • If your worldwide assets have an aggregate net value of more than $2 million. 
  • If you fail to comply u.S. tax for the past five years. 

Thus, if Exit tax implications can be applied to you, then you’ll be treated as if you have sold all your properties on the day before you filed for renunciation of citizenship and you’ll be taxed on your capital gains. Moreover, the gifts you have given to a U.S person after the renunciation is also taxable and should be paid by the receiver of the gift. 

As such, it is crucial to pay your taxes on time and settle your tax debt before you renounce your citizenship to avoid penalties. Besides that, using the Streamlined Filing Compliance Procedure may also allow you to become tax compliant which is a great factor to leave the U.S. tax system with a clean bank due to renunciation. 

how long do you owe taxes after renouncing your us citizenship

FAQ

Can I Renounce my US Citizenship to Avoid Taxes?

Renouncing U.S. citizenship doesn’t free you from tax obligations. Thus, it is crucial to settle your tax obligations in a timely manner before renouncing your citizenship to prevent tax penalties and consequences. Furthermore, there are certain criteria to meet to determine whether you’re a covered expatriate and are subject to exit tax or not.   

Is there an Exit Tax to Leave the US?

Yes, exit tax will be taxed to an individual who renounced their U.S. citizenship if they meet the following criteria:

  • If their average yearly income tax liability is more than $162,000.
  • If their worldwide assets have an aggregate net value of more than $2 million. 
  • If they fail to comply with U.S. tax for the past five years. 

What are the Consequences of Renouncing US Citizenship?

When you have decided to voluntarily renounce your U.S. citizenship you will no longer be an American citizen and won’t be protected by the US government. You will become stateless if you fail to become a resident of another country after the renunciation process. Moreover, renouncing your U.S. citizenship is also giving up your responsibilities as a U.S. citizen and you may need a visa when you wish to visit the United States. 

How Can We Avoid Exit Tax in the USA?

To avoid exit tax when deciding to have a voluntary renunciation, you may consider distributing your assets to your spouse. Or, you may also attempt to keep your annual net income smaller than the threshold and avoid staying in the United States for a long time, falling under the eight years out of fifteen years residency rule. 

Conclusion

Even though renunciation of your U.S. citizenship may sound tempting, you should know that this process may take a long time and lengthy process. Before you decide whether renouncing your U.S. citizenship is the best thing for you, you should understand the pros and cons of this procedure and how will it affect you, your family, your assets, and your tax obligations. On top of that, you also have to pay taxes on time to settle tax obligations to all your assets to avoid penalties and negative consequences during the renunciation process.

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