How to Renounce Us Citizenship in Two Easy Steps
Renouncing US Citizenship: Everything You Need to Know
05/27/2022
Millions of US expats overseas are required to file their US tax returns each year. However, a growing number of these Americans abroad consider renouncing their US citizenship and cutting ties with the US for good.
Renouncing US citizenship is far from an easy process, and there are many factors to consider beforehand. This article answers some of the most common questions we get from our clients, while also explaining the process and pros/cons to help you decide if it's the right choice for you.
Why Do Some Americans Renounce Their Citizenship?
Americans worldwide renounce their citizenship for different reasons. However, one of the top factors driving the surge is what a handful consider the US' harsh tax and anti-money laundering regulations, which can be a source of headaches without the proper guidance.
The US has a citizenship-based taxation system that requires American expats to declare their worldwide income and file US taxes, no matter where they live. And ever since the introduction of the Foreign Account Tax Compliance Act (FATCA) in 2010, international banks have been under pressure to report the financial activities of US citizens in their territories.
These policies have resulted in some US expats losing their overseas bank accounts and/or banks refusing them as clients altogether. Here's one testimonial of a Pennsylvania native in Sweden whose children can't open a bank account:
"A big problem is for our children who are finishing up school and starting their careers. They are the ones who are refused accounts and services," says the US expat. " My friend's son was already refused opening an account because he is American."
Tax & banking compliance is certainly feasible (it's made especially manageable with expert support!). Though, FACTA regulations do leave some US expats bitter against Uncle Sam. "I believe that the USA is going to lose a number of citizens if nothing is done," continues the expat.
Pros and Cons of Renouncing Your US Citizenship
Is renouncing your US citizenship the right choice based on your situation? Here are the pros and cons to help you make a choice:
Pros
The most significant benefit of renouncing your US citizenship is to free yourself from the stress that can accompany US tax time. You'll no longer have to pay taxes on your worldwide income, and you can say goodbye to fears of double taxation.
Renouncing your US citizenship also means freeing yourself from the IRS' filing requirements. You won't have to report your foreign bank accounts with FBAR filings or file a US tax return. Any US tax laws that could come in the future won't impact you.
If you decide to open a bank account in a foreign country, renouncing your US citizenship gets FATCA 'off your back.' You won't have to worry about foreign banks refusing to open an account for you because of your ties to the States.
Cons
Renunciation is not a way of avoiding taxes altogether. Before starting the procedure, you must be compliant with all of your tax obligations and you must pay taxes owed, if any, for the past 5 years of noncompliance.
Read more: The IRS Streamlined Procedure
Keep in mind that when you renounce your US citizenship, it is irreversible. The only exception is if you renounced your US citizenship before the age of 18. In this case, if you change your mind, you can file a claim to the Department of State within six months of turning 18.
You also won't have a vote in any US election or benefit from the protection that Americans receive abroad. Depending on your new passport, you'll need a visa or ESTA to travel back to the US.
How to Renounce Your US Citizenship in 5 Steps
So you've weighed the pros & cons, and you're leaning toward renunciation. To set expectations, the full process can take between 3-6 months. With some embassies being closed during Covid–19, the wait times may be even longer.
Here are the steps you must follow to officially break ties with the US:
Step 1: Talk With a Professional Advisor
Before you decide to renounce your American citizenship, evaluate how much potential Exit Tax is associated with giving up citizenship with a professional advisor. It's crucial to understand the financial consequences of your decision to see if it's the right move for you and your family.
Step 2: Obtain a Non-American Passport
You can't be "stateless" on paper and lack the protection of any government to renounce your US citizenship. You need residency (or citizenship) and a passport in a new country to start the renunciation process on a good foot.
Being "stateless" also makes other things complicated, such as being able to rent or attending a school.
Step 3: Complete the Renunciation Form DS-4079
Before you schedule a renunciation appointment with a US Embassy, you need to fill out Form DS-4079, which is available for download online. Other documents you might have to complete include:
- – DS-4080 (Oath of Renunciation of the Nationality of the United States)
- – DS-4081 (Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of US Citizenship)
Once you complete the necessary forms, you're ready for your appointment.
Step 4: Schedule Your Renunciation Appointment
Schedule your renunciation appointment at a local US embassy or consulate in your new foreign host country. Bring your Form DS-4079 along with your birth certificate, US passport, and new foreign passport.
Step 5: File Your Last US Tax Return
The last step of the US citizenship renunciation process is to submit your taxes. You'll file your final US tax return along with Form 8854. This form requires you to certify you've been compliant for the previous 5 years as well. With this in mind, your last US tax return might also be filed with other previous years' returns. Filing under either the Streamlined Procedure or Certain Procedures for Former Citizens allows for penalty-free filing when catching up.
Read more: What Is The Relief Procedures For Certain Former Citizens?
How Much Does It Cost to Renounce Your Us Citizenship?
At your embassy appointment, you'll need to pay a one-time fee of $2350. However, if you qualify as a "covered expatriate", you might also have to pay an exit tax on all your assets as well. Covered expatriates are US citizens that meet one of these three criteria:
- – For the five taxable years before the expatriation date, you have an average income tax of more than $178,000 (up from $172,000 in 2021)
- – You own more than $2 million in worldwide assets
- – You fail to certify that you've been compliant with your tax returns over the past five years.
Reiterating – it's best to contact a tax expert to help you calculate how much you'll pay in exit taxes instead of estimating the costs on your own.
Is Renouncing Your Us Citizenship the Right Decision for You?
Whether it's worth renouncing US citizenship depends entirely on each expat's circumstances and motivations. The choice makes sense for an expat who:
- – Moved board permanently
- – Has citizenship of another country
- – Is up to date with their US tax filing (but wants to avoid the future hassle)
- – Has no ties or close family in the US.
For most expats though, the costs and disadvantages outweigh the benefits. Whatever your circumstances, it's always worth consulting a US expat tax specialist CPA, who can formulate an informed, personalized plan.
At Bright!Tax, we've helped countless American expats find the best strategy to minimize their tax burden and reduce their stress while abroad. Contact us today to learn more about how we can assist you!
Source: https://brighttax.com/blog/renouncing-us-citizenship-everything-expa-need-to-know/
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