Several individuals have decided in recent years to renounce their U.S. citizenship. Many more will follow this decision as they learn more about it, but many complex tax ramifications can occur. Be sure you understand what you are giving up by doing this before making a move.
Tax considerations are not a primary reason for renouncing their U.S. citizenship for most individuals. There are many other ways an individual can benefit by transferring his or her citizenship to a foreign country, such as Canada or the European Union (E.U.).
If you have U.S. citizenship and have lived abroad for ten or more years, you may be entitled to a one-time exclusion from the U.S. Exit Tax. An exit tax is levied on the net worth of a foreign estate. The tax equals 35% of the fair market value of all property owned by the individual worldwide, reduced by any debts owed before departure from the country. The U.S. imposes an exit tax on citizens who give up their citizenship or long-term residents who end their residency. The amount owed is determined by a few factors; how much money they made while living in America, how much they owe in U.S. taxes, and how their assets are divided when they leave America.
Ultimately, if you want to renounce your U.S. citizenship, you will want to consult with a tax attorney in your area. They will help you be sure that you understand the tax responsibilities that you will be accepted by renouncing your citizenship. With this being said, some individuals still feel as if they cannot stay in the United States any longer and wish to renounce their citizenship. Here's a complete breakdown of six major consequences a person faces while renouncing their U.S. citizenship.
Cost ConsiderationsThe cost of renouncing your citizenship is $450. This one-time fee includes drafting the required paperwork and submitting it to the state department. Whether you are staying in the United States or leaving, you will still have to pay any back taxes you owe to the IRS. The IRS will send out a bill before they go to collect taxes owed from accounts, assets, or property owned by an individual who renounces their U.S. citizenship.
Many people cannot determine the exact amount of cost endeavor you have to face while renouncing citizenship from the U.S. If you want to give up on any citizenship, you need to have another one first. Whether an investor or a businessman, getting second citizenship is not cheap. Looking at your options, citizenship through descent is often a time-consuming and frustrating job that will certainly give you headaches. On the other hand, naturalization will take years with tax obligations. Additionally, citizenship by investment demands that you pour in some liquidity of around six to seven figures before getting any type of tax benefit.
Fortune plays out great for you, and you get dual citizenship by birth. Now you can go on to enjoy amazing tax benefits with your dual citizenship. However, there is still one thing that troubles most minds, the renunciation fee. So, the us government, in an attempt to tackle increasing renunciation, introduced FATCA. With this, U.S. State Department has increased the paperwork and added a special renunciation fee for people looking to renounce their U.S. citizenship. While most countries do not charge even a single penny as a renunciation fee,
U.S. citizens have to pay a whopping high sum to facilitate their renunciation.
FATCA was introduced back in 2010, and with its arrival, the U.S. government started charging around $450 as a renunciation fee. It may not seem like a huge number to you, but it's four to five times higher than other western countries of similar status. Four years later, the new structure of the renunciation fee was launched, setting it up at $2.350 (an increase of 422 percent). This is the highest renunciation fee in the world. For the government in the U.S., the taxes you pay through your stay are not enough to facilitate your leaving; instead, you have to pay $2,350 to renounce your citizenship. This high renunciation fee is why most people avoid renouncing their citizenship in the first place.
The Exit TaxThe Exit Tax is a tax that is levied on the net worth of your foreign estate. It is similar to the capital gains tax you pay when you sell your home. The U.S. government levies an exit tax on citizens who give up their citizenship or long-term residents who end their residency. The amount owed is determined by a few factors: how much money they made while living in America, how much they owe in U.S. taxes, and how their assets are divided when they leave America.
Additionally, there are a few scenarios where a person renouncing his/her citizenship might be expelled as an expatriate. In such cases, the total amount of exit tax you have to pay will also be triggered a lot. Mainly, there are three scenarios, and they are all based on or around the complete assets you have in the U.S. Before you settle your assets by selling assets, you need to know whether or not you fall under the category of an expatriate. Here's a complete breakdown of three cases that can trigger your overall exit tax and some tips to avoid so:
1. You Have a Net Worth of Over two Million Dollars
For an expatriate to fall under this category, they need to have a net worth of over two million dollars, and they must be a citizen of the U.S. The two million dollar net worth is after deducting debts you owe the U.S. government. The net worth of a business is calculated by taking the assets and subtracting liabilities from them. There are different ways to calculate the net worth of a company. These methods are based purely on the type and size of the business.
While renouncing your U.S. citizenship to avoid taxes sounds fun and attractive, it can soon turn into a nightmare. If your business has a considerably high net worth, you will be required to pay heavy taxes to leave the country. For businesses on the verge of touching the two million mark in your net worth, this is the perfect time to renounce your citizenship. Here's a quick overview of different types of assets that are considered while preparing your net worth:
- The first and foremost is the total cash in holding by your business. Cash makes for the starting and most basic part of your assets, and you are needed to report it while renouncing.
- While there are many debates about cryptocurrencies considered under net worth, if you owe some crypto coins, it is suggested not to take any chances and report it in your net worth.
- Real estate in the U.S. and worldwide also makes for a major part of your net worth. Additionally, the total holdings of your business in the stock market also need to be reported while preparing your net worth.
2. High Average Tax Liability
Such circumstances of high average tax liability are a very rare occurrence. If you are a businessman or entrepreneur living abroad, you should be making a lot of money to pay a high tax amount of $160,000 per year. To qualify for such a high tax amount, you must have a high salary from your own company. You'd also need to be a citizen and live in America for five years before you qualify for these taxes.
It is important to note that the person who renounces their U.S. citizenship is not eligible for tax credits or deductions. Therefore, if your average tax rate has been high over the year, you will be required to pay an exit tax when you give up your citizenship. On the other hand, if the tax liability is high, it may cost more to remain a citizen than leave. If this is the case with you, then make sure that your preparations are well in advance, as it would be a bit tricky for you to complete all legal formalities for renunciation in a very short period.
3. Tax Compliance
Let's start by saying that you will still be a U.S. citizen even after renouncing your citizenship. It does not mean that you are not liable for paying any tax in your country. It means that you do not have to file and pay taxes in the U.S. However, if you conduct transactions overseas through U.S. banks or securities exchanges, you might have to pay taxes for that.
If you are a taxpayer in your home country, deciding to renounce your citizenship is the best course. Having tax compliance is something you do not want to worry about while moving abroad. This was one of the major factors that led me to renounce my U.S. citizenship. However, renunciation of U.S. citizenship is a complicated way. Also, there are many stories and experiences of people who have given up their American citizenship with no knowledge or experience on this subject.
Therefore, you must get some tax advice before giving up your U.S. citizenship. If you are not a businessman and you are just a taxpayer, then it is recommended that you should file your taxes even after giving up your U.S. citizenship. Additionally, if you have a business in
America, it might be better for you to remain a U.S. citizen as you will have to face a high exit tax while leaving the country for good.
The U.S. has one of the highest rates of exit taxes of any country globally. But it is not clear how much it collects in total because there are many causes of exit, including naturalization losses, estate tax, and capital gains which are not considered part of the tax base.
Past TaxesIf you have already paid a past tax, it will all come down to whether or not the U.S. government has forgiven you. If so, then you do not need to pay any exit tax. If this issue is not taken care of, it can be complicated to get your whole U.S. taxes waived. You must have a business deal with the U.S. government and a significant amount of assets in America that they could take as collateral by asking you to pay off your taxes. It is important to note that if you consider renouncing your citizenship and going abroad, please make sure that you provide some clear reasons for renouncing your citizenship.
For example, you can say that you have been living abroad for some years and do not want to pay any tax to the U.S. government. You can also say that you do not want to be branded as an expatriate or tax evader by default. Remember this. There is no way out of the U.S. without paying your due taxes. Also, there are chances that you might be in tax compliance but still have dues in the form of tax debts that are still not paid. You need to clear up such obligations before getting to disappear from the U.S. If there is something you have due before renouncing your citizenship, then you still have to pay them after renouncing your citizenship.
Estate TaxOne more important step is to ensure that your net worth will be worth enough to avoid paying an estate tax. If you are planning to renounce your citizenship and leave the country, then it is recommended that you should have a fair idea of your estate tax. This tax is payable by the person who leaves the country and the person who receives any legacy from him/her. If you are in a high tax bracket in America, then it can be better for you to stay as a U.S. citizen, especially if you have significant assets in America.
For example, if you have a 100 million net worth, you can leave it all behind for your kids after renouncing your citizenship. However, if you are transferring more than $2 million outside the country, you will have to pay a transfer tax of 40%. The major exception is that the first 60 thousand dollars that individual transfers are not taxed when they do so within a certain time frame. However, there is no such exception for those who renounce their U.S. citizenship.
Gift TaxWhen you renounce your U.S. citizenship, you are also declaring that you do not want to receive any gift from your friend or family member. Therefore, as a result, one of the things that would be included in your tax will be the gift tax. Depending on the amount of money used for gifting and the number of people who have gifts to give you, there can be a gift tax ranging from 0% to 35%. Above all this, if you transfer more than 60 thousand dollars outside America without any exemption in terms of exemption when renouncing your citizenship, then you will have to pay a 40% gift tax on it.
It could be very well possible that an individual has to pay taxes based on how he divided his assets while leaving the U.S. This tax intends to tax wealthy individuals who leave the U.S. and give up their citizenship. The U.S. exit tax is also imposed on individuals who have renounced their citizenship before residing in the U.S. for more than one year. The tax may apply to all income earned and assets owned by the individual when they became a U.S. citizen or permanent resident and what they own at the time they leave America, either voluntarily or involuntarily.
Final Reporting ObligationsIt seems that everything is set, and now you can focus on your new life. But it is not. You have to take care of several tax reporting obligations while renouncing your U.S. citizenship. For example, suppose you are an American citizen. Even if you renounce your U.S. citizenship, the IRS can still get hold of your tax returns from the previous 5 and 10 years from the date when you stopped being an American citizen.
- Dual Status Income Tax Return
- Form 8854
Also, if you file your taxes following the U.S. tax code (say, if you are in the U.S.), you have to have a Foreign Tax Compliance Act. This acts like a contract that ensures that you are not hiding anything from the U.S. government. There is also a significant chance that even after renouncing your U.S. citizenship, you might pay some taxes to America directly. All of this will be determined by how much money you have and how powerful your lawyer is because if he/she cannot convince the IRS with some loopholes, the IRS can put pressure on you.
Complete Planning To Avoid Renunciation TaxBefore you decide to renounce your American citizenship, it is prudent to look at what other taxes you might have to pay after doing so. For example, if you apply for citizenship in another country or move to another country, you will be subject to the tax laws of that particular country as well. You might also have tax obligations as long as your assets and income remain outside the U.S. while still working in America.
If you know that there is no possibility of paying any more taxes from the U.S. government after renouncing your citizenship, it would be wiser for you to do so even after understanding the consequences. However, if you are not sure about the future and how you will pay taxes from America, then it is better to consult a tax expert before taking a plunge. Then you will have an idea of what exactly you will have to do once you renounce your citizenship.