Renouncing U.S. Citizenship

U.S. citizens and green card holders contemplating relinquishing their U.S. citizenship should first consider the tax implications that arise due to exit tax in the U.S. Nearly one-third of American expatriates either plan to renounce their citizenship or are seriously considering it. Expatriates are required to pay U.S. income taxes on their global earnings, which can lead to potential double taxation. Additionally, they must comply with extra reporting obligations, such as filing the Foreign Bank and Financial Accounts Report (FBAR) for any non-U.S. bank accounts they hold.

It is advisable not to rush into relinquishing citizenship due to the irreversible nature of the decision as well as potential complications with estate taxes. Instead, seeking expert tax advice to effectively manage obligations and planning strategically can help avoid any unforeseen pitfalls and offer a more pragmatic solution. When relinquishing U.S. citizenship or renouncing a long-term U.S. Green Card, it’s very important to first understand the concept of covered expatriates and their tax implications. Covered expatriates are categorised based on three criteria:

Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency exceeds $190,000 for 2023. This figure is adjusted each year for inflation.
Your net worth exceeds $2 million.
Failing to certify tax compliance.

If these thresholds are not met, individuals are exempt from the exit tax but must still file Form 8854.

The U.S. Exit Tax, also known as the expatriation tax, is governed by IRC Section 877A. It's designed for high-net-worth individuals, ensuring taxation of their worldwide income and assets before exiting the U.S. tax system. This tax is crucial for those severing formal ties with the United States, as it subjects covered expatriates to taxation on the net unrealised gain of most worldwide assets, with an exclusion to offset some of these unrealised gains.

There are exceptions to covered expatriate status for minors and dual citizens who meet specific criteria, allowing them to avoid certain tax liabilities. For further guidance on understanding covered expatriate status and its implications, we welcome you to contact our U.S. Tax Services Team for assistance and support.

Understanding covered expatriate status is crucial, as it determines tax obligations when renouncing citizenship. The exit tax calculates the final tax bill based on the remaining tax obligations, including income or capital gains taxes. Strategies to potentially modify covered expatriate status include asset distribution between spouses and ensuring compliance with legal financial strategies. However, any financial decisions must adhere to legal standards to avoid severe penalties.

Consulting with an experienced expat tax professional is recommended to navigate tax obligations effectively. Furthermore, expatriates should anticipate future U.S. tax filing requirements and tax liabilities post-renunciation, seeking expert advice for meticulous planning beforehand. If behind on U.S. tax returns, expats can leverage IRS amnesty programmes like the Streamlined Filing Compliance Procedures to rectify non-compliance without penalties, ensuring adherence to tax obligations even after renunciation.