A rapidly increasing number of Americans have been renouncing their US citizenship over the last decade, reaching an all-time record of 6,705 in 2020. This trend has been accelerated by the stringent tax regulations which have been opposed upon US citizens in recent years, complications related to information sharing like FATCA, and various other complex factors.
Those considering following suite should be warned that it is not an easy process. There are complexities and costs involved in renouncing your US citizenship, and it can create additional tax burdens in the beginning.
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In this article, we will explain why so many people are renouncing their US citizenship, the factors to consider before doing so yourself, and the steps to take if you decide you still want to renounce.
The main reason why so many people are renouncing their US citizenship is to escape the heavy tax burden which is placed on Americans. US citizens are required to report and pay taxes on all of their worldwide income to the US, regardless of where they reside.
The US has also implemented other stringent banking and reporting regulations (e.g. FATCA) on Americans, leading to lack of financial privacy and freedom.
Other reasons why people might decide to renounce their US citizenship include various family circumstances, political or social reasons, legal issues, and so forth.
It is a big step to renounce your US citizenship, so you should carefully consider all the factors and implications involved.
Renouncing your US citizenship is an irrevocable decision. Once you have renounced, you will lose all the rights and benefits associated with being a US citizen, such as the right to vote in US elections and the right to freely work and live in the US. You will no longer have the protection of the US government while you are overseas.
If you want to visit the US in future, you will be required to apply for a visa just like any other foreign national. Ironically, if it is discovered that you renounced your citizenship purely to avoid paying taxes, you could be completely barred from entering the US in future.
Renouncing your US citizenship can be expensive. For starters, you will have to fork out $2,350 for the renunciation fee alone. Then there are additional expenses to visit the United States consulate multiple times to complete the process.
Finally, depending on your situation, you may be liable to pay a hefty “exit tax”. An exit tax is levied to those who are considered a “covered expat”, which applies if you fall into any of the following categories:
An exit tax is basically calculated as the capital gains taxes you would theoretically incur if you had to sell all of your assets at the time of renunciation. This involves a valuation of your entire estate and a calculation of the exit tax based on this.
The first $737,000 (as of 2020) of theoretical capital gains may be excluded, meaning that you are only liable to pay taxes on any capital gains exceeding this amount.
Logically, if you have a very large net worth, the exit tax which comes with renouncing your US citizenship is likely to be substantial. Furthermore, you may again need to pay capital gains taxes to your new country of residence on the same assets if/when they are actually sold in the future, in accordance with the taxes which are levied there.
Renouncing your US citizenship is not as simple as just throwing your passport in the fire and heading over to your country of second citizenship. There is extensive paperwork and administrative procedures involved.
It will most probably take a few months at the least, and more than a year in some cases. You should understand all the requirements and complexities involved, as well as the implications and obligations, before embarking on the process of renouncing your US citizenship.
Before you even begin trying to renounce your US citizenship, it is extremely important that you make sure you already have dual nationality. If you don’t already have second citizenship in another country, you should start by taking the steps to acquire it.
If you renounce your US citizenship without a second passport, you will become stateless, which is not a good situation to be in for obvious reasons.
As we explained earlier, if you are not up to date with your tax returns over the last five years, you may be considered a “covered expat” meaning you will be subjected to a hefty exit tax.
For this reason, it is important to complete any outstanding tax returns and make sure you are fully compliant before you begin the renunciation process.
Once the preliminaries of a second citizenship and tax compliance are taken care of, you can go ahead and schedule an appointment at a US embassy or consulate abroad. It is best for this to be in the country in which you have your second nationality, but can also be done elsewhere abroad.
Before attending your first appointment, you will have to fill out the DS-4079 form (“Request for Determination of Possible Loss of US Citizenship”). Along with this, you should attach the supporting documents, which include:
You will usually have to attend two appointments to complete the process. The first appointment will involve an interview to ensure that you are not renouncing your US citizenship under duress.
During the second appointment, you will be required to take an oath which states your desire to renounce citizenship. All documents are then submitted, and once they have been reviewed and accepted, you will receive a Certificate of Loss of Nationality. It usually takes about 1 – 2 months to receive confirmation.
You will then be required to pay the renunciation fee of $2,350. This fee has increased astronomically over the last decade, from $450 to the current price. It is the highest renunciation fee in the world at 20 times higher than the average of other developed nations.
In addition to this fee, you will need to file your final income tax return for the tax year in question if you haven’t already done so. If you are considered a “covered expat”, you will also have to pay the associated exit tax.
There are certainly a number of valid reasons for wanting to renounce your US citizenship, and it makes sense why an increasing number of US citizens living on foreign soil are deciding to do so.
Those who are fed up with having to fork out taxes each year to a country in which they no longer even live or work in, and those who are concerned about having to report all their financial activities and foreign-owned assets to the IRS, naturally look for a solution in the form of renunciation.
That being said, it is not as simple as one would hope to sever all citizenship ties with the US. There are complexities, costs, and time requirements involved.
You should familiarise yourself with the process outlined above, and seek expert advice if you are unsure how best to proceed. If all the steps are properly followed, you can certainly have a smooth and successful renunciation.
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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. Read more here about FATCA and CFC laws.
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