Renounce US Citizenship & Exit Taxes

Simon Misiewicz

Expat & Property Tax Specialist

6th March 2022

What are the basics of Americans renouncing (giving up) US citizenship to prevent the payment of taxes to the IRS?

Renouncing U.S. citizenship has significant tax implications, including the possibility of being subject to the Expatriation Tax, also known as the "exit tax." Individuals renouncing citizenship who meet certain criteria (like a net worth exceeding $2 million or having paid a significant amount of U.S. taxes over the past five years) are treated as if they sold all their global assets at fair market value, potentially incurring capital gains taxes. Additionally, they must certify that they have complied with all U.S. tax obligations for the five years preceding the date of expatriation, and failure to do so can result in severe penalties and taxation consequences.

We know that the frustration over taxes and FATCA pushes more US ex-pats to consider renouncing their American citizenship. We will guide you through the How to Renounce (giving up) Citizenship process.

You will need to think about USA Expat Exit Taxes.

It is possible to renounce USA citizenship by Americans, avoid most future US taxes and still receive income and benefits from the United States.

Renunciation can be a positive and attractive option for individuals looking to simplify their lives and reduce taxes in the US, especially in light of Global intangible low-taxed income.

This often includes situations where Americans have lived and worked in a different country for an extended period, raised a family there, and owned property and possibly other assets in that country.

Renouncing citizenship can provide a way to simplify the burdens of maintaining ties to the US through nationality. We will discuss how to renounce citizenship here.

Before undertaking to renounce citizenship, it is worth fully understanding how this will impact your rights and legal obligations. Giving up your citizenship should not be a quick decision. Many people have regretted giving up their American citizenship.

Whilst you are reading this, an American living in the United Kingdom, you may be interested to learn more about the UK and United States tax treaties.

How to renounce citizenship by American expats living abroad

The renunciation (giving up US citizenship) process for Americans comprises two key stages:

* Submission of documents, including Form DS 4079 to state that you wish to give up their American citizenship.

* In-person interview at an Embassy outside the US to confirm the renouncing citizenship request.

Failure to meet these requirements, such as applying within the US, will not constitute renunciation.

The processing fee of $2,350 must also be paid. This is the highest renunciation fee in the world.

Renunciation becomes official on reciting the Oath of Renunciation; then, you are issued a Certificate of Loss of Nationality. This is a serious decision to make, and American expats living abroad should not make renouncing their citizenship decision just over taxes.

What are the benefits of renouncing citizenship for Americans?

One of the most significant benefits of renouncing US citizenship is that non-covered ex-pats have no immediate liability.

You must file Form 8854 with your final return to determine if you are a ‘Covered Expatriate’ or ‘Non-Covered Expatriate’.

A Covered Expatriate may be subject to exit taxes. This is a way for the IRS to ensure that Americans do not renounce their citizenship to avoid a hefty payment.

To be considered a Non-Covered Expatriate (and exempt from exit tax), the following conditions must be satisfied:

* Americans must have filed 1040s for the five years preceding the year you give up your USA citizenship

* Americans born as dual citizens that are taxed as a resident of another country cannot live in the USA for more than 10 of the last 15 years

If Americans are Covered Expatriates, they may be required to pay exit taxes based on the gain on items they own, such as property, stocks and bonds.

Even after Americans renounce citizenship, they may still have tax filing requirements, especially if Americans hold property, investments or financial assets located in the USA and foreign counties within Controlled Foreign Corporations.

Another benefit of renouncing US citizenship is that you don’t need to liquidate assets and investments in the US.

After renunciation, you are considered a non-resident alien (NRA), so the US’s financial activity on investments and/or assets needs to be reported on Form 1040NR instead of the previously-used Form 1040.

American tax rates on various items will depend on the rates in the UK in which you are a resident and any treaty the United States has in place with the UK.

Non-business-related income will be taxed at 30% unless the US-UK treaty states otherwise.

Business-related income is taxed using the tables provided by the IRS. It uses similar tax rates as Form 1040.

A third benefit of renouncing citizenship is that Social Security benefits are available to those who qualify.

If you have paid into Social Security for a full 40 quarters, you can collect benefits when you retire. Your retirements benefits may be affected by your citizenship if you no longer contribute towards your social security.

As an NRA, you can usually continue to collect Social Security just as you would if you remained s an American citizen.

Will Americans need to fill out Form 8854 before renouncing citizenship? USA exit taxes

Before Americans renounce citizenship, they must fill out Form 8854 and attach it to their final 1040 return.

To qualify as a Non-Covered Expatriate, Americans must meet the following criteria:

* Your net worth (retirement accounts, bank accounts, property values owned inside and outside the US) is below $2M on your renunciation date.

* You can gift up to $145,000 to an NRA spouse every year

* You must file Form 8854 in the year following your renouncing citizenship.

 Explore a detailed guide on the process of renouncing (giving up) US citizenship and navigate the intricacies of USA expat exit taxes effortlessly. Our comprehensive resources provide step-by-step instructions, ensuring a seamless transition for those considering this important decision. Gain valuable insights into the complexities surrounding how to renounce US citizenship while understanding the implications of USA expat exit taxes, making informed choices for your international journey.

How can I give up my USA citizenship, and what are the necessary steps involved in the process?

To give up your citizenship, you must visit an embassy or consulate, complete the required forms, pay a fee, and attend a renunciation ceremony.

What are the key considerations and potential challenges associated with USA expat exit tax when deciding to give up my USA citizenship?

Key considerations when giving up your citizenship include understanding the implications, potential capital gains, and exit tax calculations, along with challenges related to financial planning during the transition.

Is there a specific timeline or waiting period involved in the renunciation of citizenship, and how does it impact expatriates?

While there is no specific waiting period, the process may take several months. Expatriates should plan accordingly and be aware of the potential impact on their residency status.

Can you provide insights into the implications and financial planning required for USA expats considering renouncing their citizenship?

Expatriates should be aware of potential obligations, including exit taxes and capital gains. Proper financial planning is crucial to navigate these implications effectively. There are IRS filing obligations when giving up your citizenship.

: Are there any exceptions or special circumstances that may apply to the process of renouncing citizenship, particularly in relation to expat exit tax?

Certain exceptions or special circumstances may apply, such as dual citizenship situations. It's essential to consult with professionals and legal advisors for personalized guidance.

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