Renunciation – The voluntary act of relinquishing one’s citizenship or nationality
Many expats may think that renouncing their US citizenship is a way to get rid of all US tax obligations and save money. In reality, however, the renunciation process is complex, costly, and can even create tax bills.
Here we address the most common myths around US citizenship renunciation:
Myth 1: I can renounce my citizenship with a simple declaration
The process for renouncing US citizenship is complex, long, and costly. The processing fee alone is $2,350. In addition, there are costs for acquiring another passport and for travel to a consulate for interviews.
You may also potentially have to pay professional fees for getting caught up on tax returns and for expatriation planning. Most importantly, depending on your circumstances, you may be deemed a “covered expat” and subject to an exit tax.
Myth 2: Giving up the US citizenship provides relief from past tax mistakes and omissions
In order to renounce your US citizenship, you have to show that you have been tax compliant for the last 5 years. If you contemplate giving up your citizenship because you haven’t filed US tax returns and FBAR in previous years, you may be in for a surprise.
As a non-compliant individual, you are a “covered expat” and subject to an exit tax. In addition, you would be subject to penalties for failing to report foreign accounts. However, under current amnesty programs, these penalties can be reduced or eliminated.
To avoid exit tax for non-compliance, you must file back returns first, before renouncing. The IRS offers amnesty programs, for example, the Streamlined Program, which requires that you file the last 3 year’s returns. Online Taxman has done that for hundreds of clients.
Myth 3: I can always get my US citizenship back later if I want
Once you relinquish your citizenship voluntarily it is extremely difficult, if not impossible, to get it back later. With renouncing the US citizenship you also give up your right to work in the US and must apply for a visa or Green Card like any other immigrant.
Myth 4: After renunciation, I can still spend as much time in the US as I want
Giving up the US passport also means giving up the privilege to travel to the US without restrictions. Like any other non-US person, your stay in the US is limited to 90 days per stay and 180 days annually.
Depending on the passport you will then be traveling on, you may even have to apply for a visa before traveling to the US.
Myth 5: I will never have to file a US tax return again!
You may still need to file a US non-resident return if you have US sourced income such as rental property, social security (withholding), or pension (withholding).
Furthermore, you will be considered a US resident for tax purposes if you meet the substantial presence test. If you are in the US over 183 days over a 3 year period (number of days in current year, 1/3 days in previous year, 1/6 days in year before the previous) you are subject to US taxation.
Is it worth it to renounce the US citizenship?
As you can see, US citizenship renunciation is not a quick fix for any tax woes or grievances. There is a lot to consider when deciding if giving up your US citizenship is right for you.
If you still want to go forward with it or get more information for your specific situation, please give us a call or schedule a consultation. We have assisted many (ex) US citizens with guiding them through this process and preparing final tax returns.
Photo by Tony Webster