Renouncing your U.S. citizenship is a huge decision that many often find confusing and intimidating. At Expat Tax Online, we can assure you that the process is not as complicated as it may seem. With enough strategy and planning, you can successfully renounce your U.S. citizenship whether it is for financial or personal reasons.
American citizens decide to renounce their citizenship for a variety of reasons. You can read more insights about clients who successfully renounced their citizenship here.
Today, we’re joined with Khandra, a senior manager at Expat Tax Online. She’s here to answer all of our most frequently asked questions about renouncing U.S. citizenship. Khandra has worked with expats for over 15 years.
Do I need to be tax compliant to renounce my citizenship?
There’s really a two part process to expatriation. One part is to schedule an interview with the U.S. Consulate and officially renounce your citizenship. This is from an immigration perspective.
Then, there is making sure you are clear on the tax side of things. This involves a few specific steps that you must complete to let the IRS know you have given up your citizenship and avoid any obstacles down the road.
Here’s what’s involved in the tax expatriation process:
- You must have a filing history for the past 5 years. To avoid an exit tax, you must ensure you did not pay more than $150K in a single year of taxes.
- You must also fill out a tax return for the year of your expatriation, resulting in 6 total years of tax filling.
- Calculate your entire net worth. If your net worth is under $2 million, the process is pretty straightforward. If it’s over, you may have to pay an exit tax.
How do I calculate my net worth?
Take inventory of your current assets. Your assets can include the following:
- retirement accounts
- household goods
- investment portfolios
- liabilities such as mortgages
Make sure you include everything you have both inside and outside of the U.S. Create a world-wide picture of your net worth to figure out if you may have to pay the exit tax.
What if I’m way behind on my U.S. tax returns?
There is a special IRS program to help you catch up on your U.S. taxes safely, without fines and penalties
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties. If you have children, we can backdate your Child Tax Credit Refund for 3 years.
Get a quote here.
If my net worth is over $2 million, do I absolutely have to pay an exit tax?
While the exit tax is avoidable, it does require up-front planning. If you have already visited the consulate to formally renounce, it might be too late. However, with strategy and foresight, there is a way to make this work. One popular option is gifting. This is a great option if you have a spouse, relatives, or children that are non-Americans.
Whatever you decide, make sure you allow enough time and work with a reliable tax expert to plan the right strategy for you.
What if I’m a Dual National?
If you were born a Dual National and live in the non-U.S. country, you do not have to worry about the $2 million net worth tax. You will not have to pay an exit tax either way.
What about the 6th tax return the year I renounce?
This is a crucial step to becoming fully tax-compliant. The year you expatriate, you must follow a dual-status tax return. This involves filling out a 8854 Form, which is basically a checklist that ensures you have the items listed previously (5 years of tax filling, asset estimate, etc…)
What if I renounce on the 1st of March 2020? When do I file?
If you officially renounce on the 1st of March 2020, you would only be tax eligible from the 1st of January to the 1st of March. However, the tax form covers the full year so you would not follow until the following year, like you would with a normal tax return.
What happens if I do not fill out a 8854 Form?
If you haven’t taken care of your taxes and just renounce your citizenship, you will not be able to certify that you are fully tax-compliant.
If you do not file your 8854 Form, you will automatically fall into the category of a “covered expatriate.” This can involve bad consequences from a tax perspective. If the IRS catches on, you will have to pay a significant exit tax.
The IRS has a far reach around the world. Many governments have signed information sharing agreements with the U.S. which would make it tough to financially operate in your new home country.
How is the exit tax calculated?
You meet the qualifications for an exit tax if you are considered a “covered expatriate”- i.e. if you have more than $2 million net worth or you failed any part of the 8854 Form. The exit tax is pretty significant. The IRS taxes you on every asset to your name, which is called a “Mark to Market” tax. Even if you don’t have the cash, you would still be expected to pay.
Can I still receive social after renouncing my citizenship?
Absolutely. You can easily receive social security if there is a totalization agreement between the U.S. and your new country. With this agreement, both countries will work together to give you your retirement benefits.
What if I live in a country that does not have a totalization agreement with the U.S.?
You are definitely still eligible. Without a totalization agreement, you would need to prove that you have worked a full 40 quarters in the U.S. However, the U.S. will not send money to local bank accounts in certain countries, such as Cuba.
Is there a difference between renouncing and relinquishing your citizenship?
There’s an important difference between the two. If you relinquish your citizenship, you have to have done something specific to warrant it. The U.S. State Department website has a list of qualifying actions, such as serving in another country’s military or making a donation to a terrorist organization. Renouncing is a more formal and thoughtful route. For obvious reasons, we do not recommend relinquishing.
Can I return to the U.S. after renouncing?
In general, yes, depending on the specific country from which you’re coming. Speak to an immigration attorney or double-check the travel requirements beforehand.
Renouncing your U.S. citizenship is a significant decision. If you need help catching up on your U.S. taxes or need a qualified expert to guide you through the expatriation process, contact us now for more information. You can also find a free renunciation guide to help you get started.