U.S. citizens find themselves living and working abroad for various reasons. Sometimes they do so because of an excellent job opportunity or because they are following someone they love. Whatever your reasons, if this is you and you’ve decided to renounce your U.S. citizenship, then you will want to know how to handle the tax requirement, learn what to do and importantly, what not to do.
Today, we will discuss what it means to be a covered expatriate, what exit tax is, and how to take an informed decision before deciding to renounce your citizenship. Rose-ann, a tax professional with much experience in U.S. citizenship renunciation, is here to talk about the tax implications. Rose-ann will help clarify which steps need to be taken and answer frequent questions about the correct procedure.
Overview of the renunciation process
Renouncing is a process that involves two steps: immigration and tax compliance. In order to start the immigration process, an email* must be sent to the nearest U.S. Consulate. Within a few days you will be contacted by someone who will give you the required information and you will receive the Department of State forms that need to be filled out.
*Some embassies have an online form or online booking process.
It is likely that someone will contact you from the consulate to confirm that this is your final decision and that you have considered the repercussions of renouncing your U.S. citizenship. The decision is irrevocable, and they want to ensure that you have not been coerced into making it. You will then be given a date to appear at the U.S. Embassy so you can hand in all the required paperwork.
Renunciation – Becoming a non-U.S. Tax Resident
At your appointment you will be interviewed by an officer of the consulate, confirming that you are certain about your decision. This is not an interrogation, but just a confirmation that you are aware of the pros and cons and are not under any pressure. The Department of State forms are signed at the Embassy and that date becomes the date of your expatriation, even if the process takes between 4 and 6 weeks to complete. This is an important date because this is the date you stop being an American citizen and are considered a non-resident alien, taxable only on U.S. source income.
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.
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Renouncing your citizenship – What is the cost?
Once you have signed the forms, you will be required to make an administration payment. The fee for renouncing U.S. citizenship is currently US$2,350, payable at the embassy when the paperwork is submitted.
That’s a huge admin fee! It’s up from just $400, but industry experts expect it to be increased even more as time goes by.
Wrapping up your tax affairs is an important step in completing the renunciation process and is not that complicated. Rose-ann answers some common queries to help you get it right.
How to wrap up your tax affairs during the year that you renounce
A final tax return must be filed and is known as a dual-status tax return. If for example your renunciation date is June 30, in any year, then a dual-status tax return will be due by June 15, the following year.
All income earned until the day before you renounce will be taxed as a resident and then for the last six months as a non-resident alien. U.S. taxpayers living abroad get a two-month extension for filing their tax return, but any taxes due must be paid by April 15 to avoid interest and penalties.
Everyone who has relinquished U.S. citizenship is liable to submit an expatriation statement, also known as Form 8854, along with their final dual status tax return. You must include a summary of your tax liabilities for the last five tax years, not including the final one, and a summary of your net worth. Net worth is a summary of your assets and liabilities and must include a computation of any gains subject to exit tax for covered expatriates.
What is exit tax?
Exit tax is paid by someone who meets any of the three tests below, making them a covered expatriate.
Meet any one of these three tests and you’ll be deemed a “Covered Expatriate”
- Tax liability test is someone whose average annual tax liability for the last five years was $172,000 (for 2021) or more.
- Net worth testis someone whose net worth on the date of expatriation was $2 million or more. This includes the value of any property, cash, beneficial interest in a trust and includes any retirement funds that they may receive at a future date from their new country of residence. For mortgaged properties only the equity is calculated into the net worth test.
- Certification test is when the taxpayer has failed to certify in a Form 8854 that they have complied with all Federal tax obligations for the preceding 5 years.
How to overcome the complication of having failed to submit tax returns for 5 years prior to renunciation?
If no tax returns were filed, the IRS makes a computation of the deemed sale of all your assets at fair market value on your expatriation date and will charge an exit tax on the realized gain as if you’d sold everything you own.
There is a way around this. If you don’t want to be deemed as a covered expatriate, you can prepare and file tax returns for the last five years before submitting your final dual status return.
Other strategies to overcome the exit tax requirements
U.S. citizens have the right to strategic gifting with an $12.92 million lifetime limit (for 2023) to gift their assets into other people’s names. This helps to minimize the net worth value that would be due as an exit tax. Rose-ann advises that before taking any steps to renouncing U.S citizenship people must first check on the net worth of their assets and to only consider renunciation once they have calculated correctly.
According to Rose-ann, before moving ahead with renunciation, preparation is of utmost importance. If you are contemplating this move you really should contact an experienced international tax specialist. Get in touch with Rose-ann from Expat Tax Online for a free consultation.
Rose-ann can help you prepare for your Renunciation appointment at the embassy.
“What you say at the embassy is less important than what you don’t say”.
Contact us at Expat Tax Online for more information.