Don’t Renounce Your US Citizenship Yet

1. Renouncing isn’t free

In years past, the State Department charged a $450 administrative fee for the process of renouncing. However, last year that fee was hiked up over 400% to $2,350. This is unfortunate for some, as the cost to renounce may simply be prohibitive now. But if you are able to afford the increased fee, you’ll need a healthy dose of patience to get through the remaining steps in the process. Some US Embassies report wait lists of up to two months for renunciation appointments due to the sudden increase in demand.

2. You may not immediately escape taxes

You have the right to give up your US citizenship, but you do not have the right to avoid taxes when you do! If you have an unpaid tax bill, Uncle Sam is going to make sure you pay up before you go.  And should your income and assets reach certain thresholds, you could also be forced to pay an exit tax the year you expatriate.

If you expatriated after 16 June 2008 and the following statements apply, you are considered a ‘covered expatriate’ and will be subject to an exit tax:

• Your average annual net income tax for the five years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($160,000 for 2015).
• Your net worth is $2 million or more on the date of your expatriation or termination of residency.
• You fail to certify on Form 8854 that you have complied with all US Federal tax obligations for the five years preceding the date of your expatriation or termination of residency.

3. You may not be able to change your mind

Renouncing your citizenship is a very personal decision—and often a permanent one, as well. If you voluntarily give up your citizenship status, it is very difficult to reverse this decision if you someday decide you want to become a citizen again. For many expats, this is a non-issue, as they didn’t have any ties to the US in the first place (e.g. accidental Americans who didn’t even know they were US citizens). Consider all future plans before taking this step because this decision is not one you can easily ‘take back’ if your plans change or your career takes an unexpected turn.

4. US travel could become challenging

The US requires you to have citizenship in another country before you are allowed to renounce, as you cannot remain ‘stateless’ after you have relinquished your US citizenship. And in the future, it may be a bit more difficult to visit the US, as you are now treated as a foreigner. You must obtain visitors’ visas to enter the US and visits may be limited to an average of 120 days or less. Remember, if you do return to the US and earn income while on American soil, your income may be taxable in the US. And what does that mean? Filing a US tax return, which is likely one of the very reasons you expatriated in the first place!

5. You cannot be delinquent on US taxes

It may seem contradictory that you must be compliant on US taxes to avoid US taxes, but the US requires that you are fully compliant with US laws for the five years prior to your expatriation. You can see how this makes sense, as the IRS is simply ensuring that you aren’t renouncing in order to avoid paying taxes the US is owed. If you are delinquent on your taxes, the IRS’s amnesty program, the Streamlined Offshore Filing Procedures, is a relatively easy way to get caught up. Right now, the IRS has waived all late filing and FBAR penalties, which is a huge relief to those who are behind. Under this program, you file the last three years’ tax returns and last six years’ FBARs and you are caught up. The IRS hasn’t set a closing date for this program, so it could end at any time. Now is a great time to get caught up, even if you aren’t sure if renunciation is in your near (or distant) future.

It goes without saying that for many expats, renouncing is a difficult decision, requiring much thought and preparation. But before you hand over your passport, we highly recommend speaking to an expat tax professional to ensure you aren’t going to be hit with a large tax bill once you do.