A record number of US citizens working abroad have decided to renounce their citizenship primarily for tax reasons. The United States is one of the few countries that tax their citizens and permanent resident status holders' income tax regardless of where they live or work.
However, renouncing your citizenship is a big, irreversible step that shouldn’t be done purely for tax purposes. Here’s why you should or shouldn’t hold on to your high-demand passport.
Benefits of Your US Citizenship
If you’re in the process of renunciation, you’ve probably considered the negatives of your US citizenship first. After all, being double-taxed for succeeding in your industry can take a massive hit on anyone's morale. Patriotic reasons aside, is there any point in keeping your US passport?
There are several benefits afforded to US citizens, including:
- US Citizen Protection: With the largest standing army in the world, US citizens are afforded protection if they find themselves in a sticky situation abroad.
- Consular Services: If you’re detained for any reason, the US government will assist you through the process by conducting cross-border legal affairs.
- US Travel: Without US citizenship, you may be denied access to the United States if you have a criminal record. Regardless, international travelers will face difficulties.
- The Right to Vote: Let’s face it, the United States holds a lot of power abroad. Who their citizens vote for can improve or destroy foreign relationships.
- The US Job Market: US citizens can legally work and live anywhere in the United States. Renouncing your citizenship closes it off unless you obtain a visa/permit.
Above all else, renouncing is irreversible. While you can get your US citizenship back, you’ll be subject to a 7-10 year-long waitlist once you lose it. If you’re currently stateless, as in you don’t possess another nationality, you won’t receive protection from any government.
Statelessness poses issues regarding travel, housing, and employment in all counties.
Renouncement Fees vs. Tax Implication
As an expat US citizen, your tax filing and reporting obligations are massive, and you have to ensure your documents arrive to the IRS before the due date. By renouncing, you may receive:
- Fewer tax and reporting obligations.
- Eliminated exposure to future US tax law changes.
- Reduced US Estate and Gift Tax exposure.
- An end to double taxation on Canadian transactions (For Canadian expats only).
However, this isn’t true in all cases. There are a lot of myths surrounding an ex-American’s tax burden and the cost of renouncement. Make sure you consider the following fees and taxes.
- Renouncing your US citizenship is $2,350.
- You have to travel back to the United States to conduct the renunciation interview.
- If you haven’t been tax compliant in 5 years, you have to file and pay back taxes.
- If you have US-sourced income, like a rental property, you may still pay US taxes.
- Covered Expats are subject to an extra exit tax, which can cost you thousands.
- Non-US citizens may pay more on Gift tax unless they structure their estate properly.
You can give away your assets to put your net worth below a certain threshold to minimize your tax implications. You aren’t considered a Covered Expat if you have a net worth less than $2 million, make less than $168,000 annually, or have stayed tax compliant for five years.
US citizens can give up to $11.58 million tax-free under the lifetime gifting exemption, so if you’re renouncing, try to max it out. You can also give away appreciated assets to minimize the mark-to-market tax, but you must do so strategically to avoid additional taxation.
