Renouncing U.S. citizenship has been on the rise. According to research reports, there has been a sudden surge in U.S. citizenship renunciation in the recent years (reaching a record 5,411 in 2016, up from 742 in 2009).
There are many individuals that acquired U.S. citizenship through their U.S.born parents even though they have never lived in the U.S. nor were they born in the U.S. This thought of having no connection might lead the individual to believe that they can avoid complying with U.S. taxes, as they have no U.S. income. However, these individuals should be aware that they are subject to U.S. tax reporting requirements even though they may have never been to the U.S. nor intend to visit the United States in the future.
Unfortunately, the current FATCA regulation, and International Data Exchange Services (IDES) between the IRS and foreign financial institutions (FFI) and foreign tax authorities allows the IRS to keep track of almost all the individuals who have a U.S. tax responsibility.
Many of these Americans are considering renouncing their U.S. citizenship to avoid the additional expenses involved in complying with U.S. taxes, which requires them to report non-U.S. financial accounts, investments and foreign assets. These assets may be their domestic savings or checking accounts, retirement plans and their primary residence. On the other hand, some U.S. citizens are considering renouncing their U.S. citizenship due to the high tax rates and complex reporting requirements.
Due to this sudden increase in renunciation, the U.S. government is increasing the citizenship renunciation costs, and tightening the renunciation process.
Until 2010, renunciation of U.S. citizenship was available at no charge. In July, 2010, the U.S. government established a renunciation fee of $450, which has increased to $2,350 by 2014 (effective from 2015). This fee needs to be paid regardless of whether it is a renunciation or non-renunciation relinquishment process, as it is the administrative processing fee for Certificate of Loss of Nationality.
Even with the increase in all these barriers, there has been no decrease in interest with respect to the renunciation and relinquishment process. Therefore, we have provided an overview of the U.S. citizenship renunciation and relinquishment process, and insight into the associated complications and estimated costs.
U.S. Citizenship Renunciation or Relinquishment
Firstly, there are two ways a U.S. citizen can give up their U.S. citizenship i.e. either renunciation or relinquishment.
The process of renouncing U.S. citizenship is a voluntary act and easier than relinquishing citizenship.
However, the person should be aware that it is an irreversible process, i.e. once renounced the person will no longer be a U.S. citizen from the date he/she takes the renunciation oath.
Relinquishment refers to losing U.S. citizenship due to a prior external event called an “expatriating act.”
U.S. Citizenship Renunciation or Relinquishment Process
The initial process for relinquishing and renouncing U.S. citizenship is quite similar.
Renouncing U.S. Citizenship
Renunciation of U.S. citizenship must be done in person. Individuals must schedule an appointment for a renunciation interview at a U.S. embassy or consulate. During the initial interview, a consular officer will provide information about renunciation and its consequences.
For the interview, the individual will need to provide their U.S. passport, an original ‘Naturalization Certification’ (if applicable) or any other documents that proves U.S. citizenship. U.S. citizens residing in foreign countries would also need to bring evidence of their foreign residence, such as a foreign national passport.
Following a time of reflection, there will be a second mandatory interview. In the second interview, individuals will need to sign a ‘Statement of Understanding’ as well as an ‘Oath of Renunciation’. These documents are to confirm that the individual is aware of his/her actions and is voluntarily applying for citizenship renunciation.
During this process, the U.S. Embassy retains the applicant’s U.S. passport, U.S. Naturalization Certificate and other applicable or requested documents until further notice.
Upon completion, the documents are forwarded to the Department of State (DOS), who will review and finalize the renunciation. This DOS confirmation could take several months. However, if the forms are filled in correctly and the individual showed intent to voluntarily renounce, the renunciation will be approved as it is the individual’s right.
Once the renunciation case is approved, the individual is issued a ‘Certificate of Loss of Nationality’ and the applicant’s U.S. passport is canceled and returned to the individual. The DOS will also provide the name of the individual to the Internal Revenue Service.
Relinquishing U.S. Citizenship
While in the case of relinquishment, the individual makes an application retroactively in order to obtain a Certificate of Loss of Nationality. For example, many “dual” citizens feel they lost U.S. citizenship when they became Canadian citizens without knowing that they had to formally renounce the U.S. citizenship.
In such cases, during this process, the applicant informs the U.S. authority that he/she feels that they no longer think they are U.S. citizens but would like the authority to formally decide and issue a loss of nationality certificate. Thereafter, the process is the same as it is for U.S. citizenship renunciation.
U.S. Citizenship Renunciation or Relinquishment Costs To Consider
The process of renunciation or relinquishment can be expensive, as there will be various expenses in the form of application, taxes, and others. As tax specialists, we focus strictly on the tax costs.
There may be unfavorable tax consequences to individuals when they expatriate if said individual is considered a “covered expatriate”. An individual is considered a “covered expatriate” if any of the following is true:
- The individual’s average annual net income tax for the five years ending before the date of expatriation is more than a specified amount that is adjusted for inflation ($161,000 in 2016).
- The net worth is $2 million or more on the date of expatriation, or
- The individual has failed to comply with their U.S. tax reporting responsibility for the five years preceding the date of expatriation (please refer to “completing past year tax filings below”).
Note that, these taxes for “covered expatriates” do not apply to individuals who did not live in the U.S. for more than 10 of the past 15 years and were either born as citizens of both the U.S. and Canada OR are under the age of 18 ½ regardless of their income or net worth.
Exit Tax (Deemed Disposition)
A newly introduced tax, the exit tax is a tax on any gains or deferred income. It is assumed that the individual has sold his property at the prevailing fair market value on the day before expatriation, and received all of his deferred income on that date.
The ‘exit tax’ is calculated as a percentage of the difference between the fair market value and adjusted cost basis (purchase price plus any qualifying expenses).
Completing Past Tax Years Filing
Covered expatriates may be able to avoid the ‘exit tax’ if they can show the IRS that they have correctly filed their past five years U.S. tax returns.
If in case, the person has failed to file or has made an error in any of the last 5 years tax return he/she will need to pay any back taxes due along with interest. Note that, this include not only the U.S income tax return, but also the other information reporting forms.
The person could also be subject to late tax payment fee and penalties on the failure to report foreign assets & accounts, such as FBAR Form 114 filing, or Form 8938, etc.
Streamline Filing or Offshore Voluntary Disclosure
In the chance that the case the taxpayer is not compliant with their previous tax years’ filing requirement, he/she may consider consulting a U.S. Canada crossborder tax professional to confirm if they qualify to file their past tax returns using the Streamlined Filing or Offshore Voluntary Disclosure Program. Be aware that the U.S. OVDP comes to an end in September, 2018.
U.S. Estate Tax
A U.S. citizen is subject to estate taxes on his estate valued above $5.6 million upon death. Once the individual renounces his/her citizenship, and becomes a non-U.S. person, they will still be subject to U.S. estate taxes upon death but only on the U.S.-based asset.
Unfortunately, the threshold limit is only $60,000 for non-U.S. persons, and the current estate tax rate is a maximum of 40%. If you are considering renouncing U.S. citizenship, it is advisable to consider these future expenses as well. (Learn more about U.S. Estates Taxes for Non-U.S. Persons)
U.S. Gift Tax
Furthermore, if you consider transferring ownership of your U.S. assets by gifting, it may not really be favorable once an individual is no longer a U.S. citizen. For example, a U.S. person can gift an unlimited amount of property to their U.S. citizen spouse, while a gift to a non-U.S. citizen spouse is subject to an annual exclusion limitation amount ($149,000 in 2017). (Learn more about U.S. Gift & Inheritance Tax for Expats)
U.S. Inheritance Tax
The IRS imposes a US transfer (gift or estate) tax on any gift or bequest made by a covered expatriate to a US citizen or resident. The tax imposed falls not on the covered expatriate but rather the US citizen or resident receiving the gift or bequest from the covered expatriate.
The tax imposed is calculated at the maximum gift or estate tax rate in effect (currently 40%). The tax is applied to the fair market value of the assets that are the subject of the gift or bequest. Value is determined on the date the transfer occurs.
It is highly recommended to consider the services of a professional before renouncing or relinquishing your U.S. citizenship to avoid any unfavorable results. A professional can assist with filing your previous returns, as well as planning to reduce or eliminate exit tax, estate and gift taxes and inheritance taxes.
A.G. TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
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