The Truth Behind Renouncing Your Citizenship to Avoid Expat Tax

After years of working hard as an expat in another country, you’ve finally established yourself financially, either as a professional or a business owner. However, the tax burden set by the IRS that you must contend with back home takes away more income than you would have liked.

An option to avoid paying additional taxes is renouncing your citizenship. In fact, 6,707 Americans renounced their citizenship in 2020—a 237% increase in comparison to 2019.

Before you head off to a tax resolution specialist and start the renouncement process, though, you need to understand the gravity of this decision. Knowing how the process happens, as well as the consequences of your action, is important if you want to make the right decision for yourself and your finances.

Hard Truths About Renouncing U.S. Citizenship

This article will detail how the process happens and what you will require to complete the renouncement of your American citizenship.

1. You will have to pay a fee and a possible exit tax

Giving up your citizenship didn’t use to be expensive; the government will immediately grant your request once you have the paperwork. Section 349 of the Immigration and Nationality Act puts a fee for expatriates who want to relinquish their citizenship. The cost is currently set at $2,350, but many expect the price to inflate as time goes by. 

Moreover, American citizens relinquishing their citizenship may have to pay an exit tax imposed by the Heroes Earning Assistance and Relief Tax Act of 2008. You will be required to pay this tax, which is set above the standard U.S. tax rates, if you meet the following criteria:

• Your average annual income tax five years before your expatriation exceeds a certain threshold ($171,000 as of 2020)
• You have a net worth of $2 million on the date of your expatriation
• You fail to certify on your Form 8854 that you were compliant with your tax obligations during the past five years before your expatriation date

2. You relinquish a lot of benefits with renouncing your citizenship

Relinquishing your American citizenship may be a practical move, but you will be losing several privileges that come with your birthright.

The first (and probably biggest) benefit that you’ll lose is the right to participate in American politics and elect leaders to the government. You also lose the protection of the American government in the country you’re based in. Citizenship of children born abroad, access to federal jobs, and ease of access to the country are also given up in the process.

3. Renunciation is a more complicated process than it appears

It’s easy to think that renouncing your American citizenship is a simple affair. While it is a straightforward process, it will take a lot of paperwork to complete.

Expats who want to renounce their citizenship must set an appointment and procure a Certificate of Loss of Nationality with a U.S. Consulate. You will also have to bring documents like your U.S. passport, Certificates of Citizenship from any country, and other completed forms. You will then have to pay the fees and possible exit tax.

Remember that the United States has the right to reject renunciation requests from expats who have no other citizenship.

4. It is irreversible

Once you’ve done the relinquishment, the act is irreversible. You cannot request the U.S. consulate to take you back again as a citizen of the United States. This is the biggest reason why it’s important to consider the battle you’re going to be dealing with. Make sure to discuss everything with your family before making the jump.

5. There are other reasons for renouncing your citizenship

Not paying huge taxes to the U.S. government is one of the biggest reasons why American expats renounce their citizenship. In fact, many of the people who apply for renunciation are billionaires. However, there are various reasons why expats choose to leave their U.S. citizenship behind, and they can range from personal to criminal:

• Citizenship with another country: It’s hard to complete your naturalization application with your country of choice if you haven’t renounced your U.S. citizenship.
• Making an oath of allegiance to another country: Verbally declaring your loyalty to another nation is fair grounds for renouncing your American citizenship.
• Committing acts of treason: Taking actions that compromise the U.S.’ sovereignty and welfare is a quick but illegal way to renounce your citizenship.
• Employment with another government: Accepting an offer to work for another country’s government that requires a declaration of allegiance is fair grounds for renunciation.
• Running for public office in another country: It’s impossible to run for office in the country you’re in without leaving your American citizenship.
• Joining another country’s military: Renunciation is a prerequisite if you desire to join another country’s military.

6. Talk to a tax expert before making any decisions

If you’re not sure whether renunciation is the right financial decision for you, it’s best to talk to tax experts first. It’s easy to make mistakes if you’re only thinking about saving your money. By talking to people familiar with how expatriate taxation works, you can make a more informed decision about your citizenship.

Talk to Us About Your Complex Tax Woes

Leaving the nation of your birth is not an easy decision to make, but make sure that you have all the right information before making the leap. As renunciation is a permanent decision, you must factor in the points raised above before making the final call.

If you have other concerns, be it renouncing your citizenship for tax reasons or tax filing, get in touch with our team at Tax Samaritan. We have years of experience in dealing with complicated expatriate tax issues, so we’re confident that we can provide you with professional insights regarding your specific situation.

Please reach out to us to see how our tax resolution services can help you.