How To Renounce US Citizenship, The Costs And Implications

Reports consistently point to the increasing numbers of Americans considering renouncing their US citizenship with the burden of citizenship-based taxation as the major driver.  Up until 2009 there were less than 750 people renouncing their US citizenship annually.  This increased to 1,500 in 2010 and continued to grow peaking in 2016 at 5,409 with a marginal drop to 5,132 in 2017. 

The numbers are not large un absolute terms, but reflect an underlying level of resentment among US expats.  We reported earlier this year that in Greenback Expat Tax Services’ 2018 survey they reported that 4.3% of expats surveyed are planning to renounce their citizenship, 17.5% are seriously considering renouncing their US citizenship and 43% are not currently considering renunciation but would not rule it out. 38% of those renouncing their US citizenship were doing so because of the tax burden imposed on US citizens.  57% of all expats surveyed stated that the tax issue they most want addressed is the repeal of citizenship-based taxation

FBAR (Foreign Bank Account Report) and FATCA (Foreign Account Tax Compliance Act) are both designed to thwart tax evaders who are hiding assets in overseas accounts.  FATCA forces foreign financial institutions to report on the accounts of their American clients. As a result, some foreign banks are refusing to work with Americans to avoid the burden of the additional filing requirements.

Neither FATCA nor FBAR result in additional taxes you must pay—they simply exist as reporting requirements.   The penalties for non-compliance can be significant.  Non-wilful failure to meet the FBAR requirements results in $10,000 penalty, but if considered wilful this increases to $100,000 or 50% of account balances, whichever is greater.   FATCA is subject to penalties of $10,000 plus $10,000 for every 30 days of non-filing after the IRS notify you of a failure to file up to a maximum of $60,000.

FBAR and FATCA as well as the continuing liability to pay US tax while working and living abroad are the drivers of the increases in the number of people considering and following through on renunciation.

 

What is involved

The process is not straightforward and, if not done correctly, will have no legal effect with the US Government.  In order to renounce your US citizenship, you will need to appear in person in a US Embassy or Consulate outside the US before a diplomatic or consular officer.

The majority of renunciations have taken place in a relatively small number of Embassies and Consulates (Canada, Australia, New Zealand, London, Dublin, Amsterdam, Hong Kong and Seoul).  These locations have developed their processes to handle applications and have the experience of doing so.  However, there are suggestions that some have introduced a high level of bureaucracy and can take up to six months to process the application.  At some of the Embassies and Consulates who have lower demand the process can be much easier and quicker with some taking days rather than months.

If you are planning to renounce US citizenship you must have arranged to have a passport from another country to avoid becoming stateless.  If you have not qualified for a passport from another country you will have difficulties travelling and there may be issues with the ability to own or rent property, work, marry, receive medical or other benefits.  As citizenship is personal to the individual, parents may not renounce the citizenship of their minor children.  Minors may renounce their citizenship provided they can demonstrate that they are doing so voluntarily without undue influence from their parents and that they fully understand the implications and consequences of doing so.  Those under 16 are assumed not to have the maturity to relinquish citizenship.

Renunciation is irrevocable and cannot be cancelled or set aside except in very limited circumstances.  Those who renounce their citizenship while under 18 can have it reinstated provided they apply within six months of becoming 18.

The process requires two appointments.  The first interview is to ensure that you know what you are doing and that you are renouncing of your own free will and not under duress.  In the second appointment, which can be anything from a few days to weeks later, you will need to swear and sign an oath.

You will need to complete a number of forms including DS-4079, DS-4080, DS-4081 and DS-4082.  Once completed these documents will be sent to the US State Department in Washington DC where the renunciation will be processed.  You will be considered to have ceased to be a US citizen from the day that you take the oath of renunciation, but it is likely to take several months before you receive your Certificate of Loss of Nationality (CLN).

Most embassies will take your US passport at the time you swear the oath, although some allow you to retain the passport until the CLN is received.

 

What are the Financial Implications of Renunciation

There is renunciation fee that has to be paid and currently stands at $2,350 (the highest in the world).

A final tax return will need to be filed as you will have been a US citizen for part of the year.

An Expatriation tax is payable if you are a ‘covered expatriate’ which will apply if:

  • Your average net income tax for the five years ending before the date of expatriation is more than a specified figure that is adjusted for inflation ($160,000 for 2018.
  • Your net worth is $2 million or more on the date of your expatriation.
  • You cannot certify tax compliance.

If you qualify as a covered expat you will be treated as having disposed of your assets the day before your expatriation and will be subject to capital gains tax.  The first $699,000 of any assessed gains are exempt and any gains beyond this will be taxed as a short term or long term gain.

The Expatriation Tax is generally only an issue for very high net worth individuals, but the inability to certify tax compliance draws many people, including accidental Americans, into the tax.  The exemption of $699,000 will take many out of having to pay any tax, but property or other gains can have an impact.  It is essential to take advice before you renounce your citizenship to see if you can structure things to avoid being a covered expat and, if this is not possible, to structure your affairs to eliminate or minimise any taxable gains.

 

What Happens After Renunciation

Having renounced your US citizenship you will need to obtain a visa whenever you plan to visit the US.  The requirements will depend on your new citizenship.  If you hold a passport from one of the 40 countries covered by the visa waiver program you will only need to complete an ESTA, which will be valid for two years.  You will not be able to work in the US unless you apply for a work visa.

You do not lose all of the government benefits when you renounce your citizenship.  You can continue to receive social security benefits overseas as long as you have worked for at least ten years in the US.  Pensions from military or other work for the US government will not be paid.

Any revenue earned or bank or financial accounts opened from the date of renunciation does not have to be reported and is not taxable by the US government: the main advantage for most people.