Thinking about renouncing your US citizenship? What you need to know

What is the process for renouncing US citizenship?

There is a two-part process to renouncing your US citizenship:

1. If in a foreign country, interviewing at an Embassy or Consulate. If in the US, with a US consular or diplomatic officer.
2. Ensure the IRS knows you have renounced your citizenship and file Form 8854.

What information does the IRS need in order to renounce US citizenship?

The IRS will need a five-year filing history, not just for income tax but all filing information including for investment returns and 5471 Forms for foreign corporations. A sixth year will also be required for the year you renounce your citizenship – on this ‘dual-status tax return’ you must properly fill out and include Form 8854.

Form 8854 is an official notification of your expatriation to the IRS and is essentially a checklist covering your prior five years of filing. Until you file Form 8854, you are still liable for US taxes.

On these returns you need to meet the following criteria:

1. On these returns you need to have never paid more than the following amounts in US tax per year (this amount changes occasionally with inflation):
2. $160,000 for 2015
3. $161,000 for 2016
4. $162,000 for 2017
5. $165,000 for 2018
6. $168,000 for 2019
7. $171,000 for 2020
8. Your net worth on the date you renounce is under $2 million USD. If it’s over $2 million, you could be charged with an exit tax.

To work out your net worth, take an inventory of your current assets and you can ballpark the figure. Real estate in or outside of the US is your most significant asset but be sure to include the market value of retirement accounts, household goods and investments in or outside of the US. After arriving at a figure, take away any liabilities such as a mortgage, to decrease your net worth.

If my net worth is over $2 million, what can be done in regard to exit tax?

If you’ve already interviewed it will most likely be too late. However, if you plan before renouncing your citizenship, then you can gift your assets to reduce your net worth. In the US, you are able to gift more than $11 million worth of assets out of your name with proper planning. After gifting, these assets will then not count against you.

If you are married to a non-American you can gift to them, or alternatively gift to other non-American relatives.

What is the deadline for the dual-status tax return for the year I renunciate my US citizenship?

If you are renouncing your US citizenship in 2020, your sixth and final tax return is from January 1 2020 to December 31 2020. But you will only be taxed on worldwide income from January 1 to the date of your renunciation. For example, if you renounce your citizenship on March 1, your taxation period will be January 1 – March 1.

The deadline for this return is still the same as any other tax returns you’ve filed. You will not be able to file the tax return until the following year.

Do I still need to file FBARs?

Yes, submit FBAR too.

Covered Expatriates:

If you renounce your citizenship at the embassy and do not take care of tax obligations after, you will be unable to certify that you completed your five years of tax returns. As a result, you will fall into a category called ‘covered expatriate with bad tax consequences. Once the IRS catches on you will have to pay an exit tax.

You will become a covered expatriate if you are worth over $2 million USD or fail to file Form 8854 or fail any of the three tests. Covered expats are subject to exit tax – essentially, the IRS pretends you sold all of your assets on the date of your expatriation at fair market value and tax you on this, known as ‘mark to market tax’. Speak to a tax professional and strategize upfront to avoid this tax.

The IRS has increased the threshold for net unrealised gain on the property for 2020 if you are a covered expatriate. The net gain that you must include in your income is reduced by $737,000 (See IRS Taxation Under Section 877A).

What is the difference between renouncing and relinquishing US citizenship?

Relinquishing US citizenship is the result of certain acts, such as serving in another country’s military or donating to a terrorist organisation.

Renouncing your US citizenship is a conscious decision followed by a formal interview.

Is there an exception for dual nationals?

If you are born a dual national and reside in the second country (not the US), you will not be treated as a covered expatriate and will not be subject to expatriation tax.

There is also an exception for minors who expatriated before the age of 18 and a half years old and were a resident of the US for no longer than 10 tax years before the expatriation date.

Can I still collect social security after renouncing US citizenship?

After giving up citizenship, you can still collect social security as long as you’ve worked your 40 quarters in the US or live in a country with a totalisation agreement. You can still access, for example, retirement benefits without being a citizen in the US.

If you were a dual national American-Australian, you would still collect social security as Australia has a totalisation agreement with the US. But, if you were a dual American-New Zealander, you would need to fulfil the requirements on your own, usually needing to work the full quarters in the US. However, if you live in certain countries such as Cuba, the US will not transfer to a Cuban bank account.

Can you travel back to the US after renouncing your citizenship?

With a viable new passport, there should not be any issues with travelling back to the US after renouncing your citizenship. However, still double-check travel requirements before booking.

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