The number of Americans going through the formal process of renouncing their US citizenship almost tripled between 2011 and 2016, according to a recent study from the US Government Accountability Office.
With approximately 4,500 cases outstanding at the end of 2016, this is still a small percentage of the American expat population. But Americans living abroad are clearly showing greater interest in giving up their US passports.
Why would a US expat want to renounce their citizenship?
Tax is the most commonly cited explanation. America is the only country apart from Eritrea that taxes on the basis of citizenship rather than residency, with the result that US expats have life-long tax obligations to their homeland – wherever they are living.
Filing tax returns – and paying tax – to two governments can be expensive and time-consuming. Furthermore, compliance with the US Internal Revenue Code often makes it difficult, and in some cases impossible, for many expats to invest and plan for their retirement. Giving up US citizenship can significantly simplify an expat’s tax obligations.
Many US citizens in the United Kingdom who decide to renounce their citizenship are so-called “accidental Americans”. According to John Wood, a London-based US tax and immigration lawyer at the law firm Butler Snow, many have only recently discovered their tax obligations to the US, and they see renunciation as a potential solution to this new complication in their lives.
“Many of these individuals accidently acquired their US citizenship by being born in the US or by being born to a US citizen parent. They generally have spent most, if not all, of their lives outside of the US and do not think of themselves as Americans. They feel confident that they are unlikely live in the US in the future,” Wood says.
There are two other major concerns for US expats that typically contribute to their decision to renounce, according to Wood. First is the prospect of having to pay US tax on assets that are subject to a low or zero tax rate where the expat lives (such as the sale of a primary residence or a business interest that qualifies for local tax relief).
Second, many US expats face challenges in simply getting a bank account or a mortgage, since many non-US banks and other financial institutions won’t accept Americans as account-holders.
What does it cost to remain a US citizen and yet comply with all the reporting requirements?
This varies hugely, experts say, depending on whether the individual in question lives in a high- or low-tax country, whether the country has a tax treaty with the US and what their income and wealth levels are.
Many US expats face challenges in simply getting a bank account
Getting help filing a tax return ranges from hundreds of dollars up to tens of thousands of dollars, depending on the complexity of your income and wealth. On top of this would be added any taxes that you owe the US.
What does it cost to renounce American citizenship?
The US government charges a fee for renouncing citizenship of US$2,350.
The cost of professional advice is likely to be higher than this. Advisers help individuals understand the tax implications of renouncing their citizenship and guide them through the process. Fees can start at a few thousand dollars for a basic renunciation, and can rise significantly, depending on the complexity of the situation.
Finally, there’s the question of the "exit tax". Americans who are deemed “covered expatriates” may well be subject to this tax. A covered expatriate is an individual who meets one or more of the following criteria:
- has paid average annual income tax over the preceding five years above a certain threshold (currently US$168,000);
- has a net worth greater than US$2million; and
- has failed to certify that they have complied with all US federal tax obligations in the previous five years.
Those who aren’t covered don’t have to pay an exit tax.
If an individual is a covered expatriate, they are treated as if they sold all of their worldwide assets for fair market value on the day before their expatriation. The net gain in excess of a certain exclusion amount (currently US$725,000) is subject to US federal income tax.
There are additional considerations relating to tax-deferred savings accounts and pensions and relating to future gifts or bequests from covered expatriates to any US citizen or US domiciliary.
Can you be barred from re-entering the US if you renounce your American citizenship?
It is very unlikely, though there have been efforts in Congress to make it easier to bar renounced Americans from re-entry if they renounced for tax reasons. Nevertheless, it is important to ensure that renunciations are done properly.
New IRS program for ‘accidental Americans’
As we were about to publish this piece, the IRS published an announcement of a new set of procedures (“Relief Procedures for Certain Former Citizens”) that it said would enable "certain" expatriates – a sub-group of "accidental Americans" who have renounced their citizenship, or are considering doing so – to avoid key taxes normally associated with renouncing.
Tax experts said the announcement was highly significant, and would likely be welcomed by many who fit the relatively narrow category of those likely to benefit from it.
Schroders Wealth Management US is a specialist, London-based provider of investment management for US citizens (or "US persons") based both within the US and elsewhere in the world.