The Cost of Renouncing Your U.S. Citizenship
Written by Tiffany Woodfield, TEP, Associate Portfolio Manager, CRPC®, CIM® and John Woodfield Portfolio Manager, CFP®, CIM®
What Is the Cost of Renouncing My U.S. Citizenship?
Renouncing U.S. citizenship involves a government fee of $2,350. Additionally, there may be tax implications, including an exit tax if you are considered a covered expatriate. It's crucial to consult with a cross-border financial advisor, accountant and lawyer to fully understand the costs and implications.
Renouncing U.S. citizenship can also carry an emotional cost, as it often involves severing a lifelong connection to one's home country. Feelings of loss, uncertainty, and even guilt can arise, especially if family and friends remain in the U.S. It's important to consider these emotional factors.
If you're a Canadian who has dual citizenship, then you may be aware of how difficult it was to obtain U.S. citizenship in the first place. It may weigh on you if you give it up.
U.S. citizens living abroad often consider renunciation due to the complexities and costs of maintaining U.S. citizenship while residing in another country. However, if you're an American living in Canada, it would be wise to speak with a dual-licensed advisor before renouncing. There are ways that your cross-border financial situation can be simplified without the need to renounce your U.S. citizenship.
This article is general in nature and is for information purposes only. It is essential to speak to financial, legal and accounting professionals about your individual situation.
TABLE OF CONTENTS
- Is Renouncing U.S. Citizenship Worth It?
- Reasons for Renouncing U.S. Citizenship
- Implications of Renouncing U.S. Citizenship
- Exit Taxes for Renouncing U.S. Citizenship
- Calculation of the Exit Tax
- Relinquishing Citizenship Dates
- Long-Term Residents
- Reporting and Compliance
- What Is the Difference Between Relinquishing and Renouncing U.S. Citizenship?
- Potential Tax Implications of Renouncing Your U.S. Citizenship
- Steps You Need to Take to Renounce Your U.S. Citizenship
- Should You Renounce Your U.S. Citizenship?
- Common Questions about Renouncing U.S. Citizenship
Is Renouncing U.S. Citizenship Worth It?
Renouncing U.S. citizenship is a significant decision with lasting implications, both financially and personally.
Consulting with a cross-border advisor helps evaluate if it aligns with your long-term financial goals.
Before you renounce your U.S. citizenship, you must find out what your long-term financial obligations will be if you retain your citizenship. When you have a cross-border accountant and cross-border financial advisor who work together, you'll spend very little time wrangling your cross-border finances. Your team will do it for you.
So, if you're attached to your citizenship, you don't need to revoke it simply because you're worried about double taxation.
In most cases, using foreign tax credits on your return prevents double taxation. A qualified cross-border team can help you simplify and optimize your cross-border wealth so that you can sleep well at night.
Reasons for Renouncing U.S. Citizenship
There are many reasons one might consider renouncing their U.S. citizenship.
However, the most common reasons include a desire to avoid double taxation, reduce the complexity of tax compliance, and eliminate financial reporting obligations to the IRS. Some people seek greater privacy and financial freedom by aligning their residency with their citizenship. Each situation is unique, so professional advice is essential.
Implications of Renouncing U.S. Citizenship
Renouncing U.S. citizenship has several serious implications.
There is the potential for exit taxes if you are considered a covered expatriate. Additionally, you will lose the right to live and work in the U.S. without a visa, and your ability to travel freely may be restricted.
From a tax perspective, you will no longer be subject to U.S. tax laws, but it's crucial to understand any ongoing tax obligations and reporting requirements.
Exit Taxes for Renouncing U.S. Citizenship
When renouncing U.S. citizenship, you may be subject to an exit tax if you meet certain thresholds.
Here are some key details:
- Net Worth Threshold: If your net worth exceeds $2 million on the date of expatriation, you may be considered a "covered expatriate" and potentially subject to the exit tax.
- Tax Liability Threshold – Average Annual Net Income Tax: Your average annual net income tax for the five years before expatriation exceeds certain thresholds, adjusted for inflation; you will be considered a "covered expatriate" and subject to the exit tax. ($162,000 for 2017, $165,000 for 2018, $168,000 for 2019, $171,000 for 2020, $172,000 for 2021, $178,000 for 2022, and $190,000 for 2023).
- Tax Compliance: If you fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the five years before expatriation, you will be treated as a "covered expatriate" and will likely be subject to the exit tax.
Calculation of the Exit Tax
For covered expatriates, the exit tax is calculated as if all assets were sold for their fair market value on the day before expatriation.
Here’s how it works:
- Mark-to-Market Regime: You are required to calculate the gain or loss on all your worldwide assets as if you had sold them on the day before expatriation. (+)
- Exclusion Amount: For 2023, the first $821,000 of gains is exempt from the exit tax. This amount is adjusted annually for inflation.
- Deferred Compensation and Specified Tax-Deferred Accounts: Special rules apply to deferred compensation items, specified tax-deferred accounts (such as IRAs), and certain trusts, which may be subject to immediate taxation or special tax treatment.
For more information from the IRS, read their page on the expatriation tax.
Relinquishing Citizenship Dates
You will be officially treated as having renounced your U.S. citizenship on the earliest of the following dates:
- The date you renounce your U.S. nationality before a U.S. diplomatic or consular officer, provided this is approved by a Certificate of Loss of Nationality from the U.S. Department of State. (+)
- The date you provide a signed statement of voluntary relinquishment of U.S. nationality to the U.S. Department of State, confirming an expatriating act.
- The date the U.S. Department of State issues a certificate of loss of nationality.
- The date a U.S. court cancels your certificate of naturalization.
Long-Term Residents
For long-term residents, you cease to be a lawful permanent resident if:
- Your permanent resident status is revoked or determined to be abandoned.
- You start being treated as a resident of a foreign country under a tax treaty and do not waive the benefits of that treaty, notifying the IRS with Forms 8833 and 8854.
Reporting and Compliance
It’s critical that you stay compliant and do meticulous paperwork should you decide to renounce your U.S. citizenship.
You must file Form 8854, which has been revised to meet new notification and information reporting requirements. This form also certifies that you have met your federal tax obligations for the five years preceding expatriation.
What Is the Difference Between Relinquishing and Renouncing U.S. Citizenship?
Relinquishing U.S. Citizenship involves voluntarily performing an expatriating act, such as obtaining citizenship in another country with the intent to give up U.S. citizenship. Examples of such an act include serving in a foreign military or government. You must inform the U.S. Department of State.
Renouncing U.S. Citizenship, on the other hand, is a formal declaration made in front of a U.S. diplomatic or consular officer. This process requires taking an oath of renunciation and receiving a certificate of loss of nationality from the U.S. Department of State. It is a more direct and often quicker method compared to relinquishment.
You will receive a consular report if your loss of nationality is approved.
"If your loss of nationality is approved, you will receive the Certificate of Loss of Nationality, accompanied by your annotated passport and report of birth. The Certificate is the sole legal document establishing your loss of nationality." (+)
Both actions result in the loss of U.S. citizenship, but the methods and contexts differ. Relinquishment involves taking specific actions with the intent to give up citizenship, while renunciation is a straightforward declaration made before a consular officer.
Potential Tax Implications of Renouncing Your U.S. Citizenship
Before you renounce your U.S. citizenship, please be aware of all the tax liabilities you may face.
We strongly recommend seeking the advice of a cross-border accountant and cross-border financial advisor before you renounce your citizenship.
- Exit tax for covered expatriates.
- Requirement to certify compliance with U.S. tax obligations for the five years preceding expatriation on Form 8854.
- Special tax treatment for deferred compensation items and possible immediate taxation or special handling rules.
- IRAs and other specified tax-deferred accounts may be subject to immediate taxation or special rules.
- Specific tax implications for interests in certain trusts.
- Potential exposure to U.S. gift and estate taxes on future gifts and bequests to U.S. citizens or residents.
- Must file final U.S. tax return (Form 1040) and expatriation statement (Form 8854) for the year of expatriation.
- May need to file Form 1040NR (U.S. Nonresident Alien Income Tax Return) if you have U.S. source income post-expatriation.
- Potential impacts on benefits and contributions.
- Depending on the state, there might be state-specific tax implications and requirements.
Understanding these tax implications is crucial, and working with a cross-border financial advisor, lawyer and accountant can help navigate the complexities of renouncing U.S. citizenship.
Steps You Need to Take to Renounce Your U.S. Citizenship
Renouncing your U.S. citizenship is a significant decision that requires careful consideration and planning.
Here are the key steps you need to take:
- Understand the Implications: Recognize the financial, legal, and emotional impacts of renouncing your citizenship.
- Consult with Professionals: Working with a cross-border financial advisor and a tax professional is important if you want to understand your obligations and avoid costly mistakes.
- Prepare Your Documentation: Gather all necessary documents, including proof of citizenship, a valid passport, and Form DS-4079 (Request for Determination of Possible Loss of U.S. Nationality).
- Schedule an Appointment: Make an appointment with a U.S. consulate or embassy to formally renounce your citizenship.
- Attend the Renunciation Interview: At the consulate, you will complete the renunciation process by signing an oath of renunciation before a consular officer.
- Pay the Renunciation Fee: There is a government fee of $2,350 for processing the renunciation.
- Receive the Certificate of Loss of Nationality: Once approved, you will receive a Certificate of Loss of Nationality from the U.S. Department of State.
Given the complexity and serious nature of this process, it is highly recommended to consult with an attorney specializing in expatriation to ensure you fully understand all legal ramifications and to guide you through the process.
For more details, visit the US government website.
Should You Renounce Your U.S. Citizenship?
Renouncing U.S. citizenship is a significant and personal decision.
Often, high-income earners and those with substantial assets or complex financial situations consider renouncing for financial reasons. Others simply wish to be released from their tax-filing obligations.
However, if you're considering this step, it’s crucial to understand ALL the implications of renouncing and the importance of having a cross-border financial planning expert to guide you through the process. Nobody can tell you whether you should do this or not. However, a team of specialists can guide you toward the right decision for you.
Common Questions About Renouncing U.S. Citizenship
The cost of renouncing U.S. citizenship goes far beyond paying the fee to renounce.
You need to consider the emotional cost and potentially hefty exit taxes. These are some common questions that come up when Americans living abroad are considering renouncing. However, we strongly recommend that you seek the advice of a cross-border accountant, lawyer, and financial advisor before you renounce.
Why is it a bad idea to renounce U.S. citizenship?
Renouncing U.S. citizenship can sever your ties to the U.S., limiting your ability to live, work, and travel freely within the country. It also involves significant financial and tax implications that require careful consideration.
What are the main problems with renouncing U.S. citizenship?
The main problems include potential exit taxes, loss of access to U.S. benefits and services, and the complexity of the renunciation process. Additionally, it may lead to emotional and familial challenges as you disconnect from your home country.
Can I get my U.S. citizenship back after renouncing it?
Regaining U.S. citizenship after renouncing it is extremely difficult and rare. You would need to go through the standard immigration process, and there is no guarantee of approval.
Do you lose social security if you renounce citizenship?
Renouncing U.S. citizenship does not automatically disqualify you from receiving social security benefits, but your ability to receive them may depend on your country of residence. Review social security agreements between the U.S. and your new country of residence.
Can I renounce my U.S. citizenship and stay in the U.S.?
No, once you renounce your U.S. citizenship, you lose the right to live and work in the U.S. without a visa or other legal status. You would need to apply for residency through the standard immigration channels.
What is an expatriating act?
An expatriating act is a voluntary action that indicates an intention to relinquish U.S. citizenship, such as renouncing citizenship before a consular officer or performing an act of expatriation recognized by law. Expatriation acts could include taking up citizenship in another country with the intention of giving up U.S. citizenship.
Who is a covered expatriate?
A covered expatriate is someone who meets any of the following criteria: has a net worth of $2 million or more, has an average annual net income tax liability exceeding a specified threshold for the five years preceding expatriation, or fails to certify tax compliance for the five years before expatriation. Covered expatriates are subject to special tax rules, including the exit tax.
What do I need to know about my final tax return?
Your final U.S. tax return must include Form 8854, which certifies that you have complied with U.S. tax obligations for the five years before expatriation. You must also report all worldwide income up to the date of expatriation and calculate any exit tax owed.
What is the exit tax?
The exit tax is a tax on the deemed sale of all your worldwide assets at their fair market value the day before you expatriate. It applies to covered expatriates and can result in significant tax liabilities.
What is the exit tax rate if I renounce my U.S. citizenship?
The exit tax rate is the same as the capital gains tax rate, which varies depending on your total income and filing status. For most individuals, this rate is 15% or 20%, but higher earners may be subject to an additional net investment income tax of 3.8%.
How do I file the exit tax?
You file the exit tax as part of your final U.S. tax return using Form 1040 and include Form 8854 to detail the deemed sale of your assets. It's crucial to consult a tax professional to ensure all calculations and filings are accurate.
Will renouncing my U.S. citizenship automatically cancel my tax obligations?
No, renouncing U.S. citizenship does not automatically cancel your tax obligations. You are required to file a final tax return and Form 8854, and you may still have ongoing tax responsibilities for income earned in the U.S. after expatriation.
What if I was born abroad?Individuals born abroad and who have U.S. citizenship may need to provide documents like a Consular Report of Birth Abroad (CRBA) as proof of citizenship when renouncing. The renunciation process requires extensive documentation, including proof of how citizenship was acquired. For those born abroad, this includes birth certificates and CRBAs.
Will I lose my birth certificate if I renounce U.S. citizenship?
No, you will not lose your birth certificate if you renounce U.S. citizenship. Your birth certificate is a record of your birth and remains valid regardless of your citizenship status. However, you will need to surrender your U.S. passport and will no longer be recognized as a U.S. citizen.
Do I need to get a Current Foreign Passports Certificate?
Individuals renouncing U.S. citizenship must have another nationality, usually demonstrated by a current foreign passport or current foreign passport certificate. Having a current foreign passport ensures that someone who renounces their U.S. citizenship is not rendered stateless upon renunciation.
Will I need to do an in-person interview to renounce my U.S. Citizenship?
The renunciation process typically includes an in-person interview at a U.S. consulate or embassy, where you must formally declare your intent to renounce citizenship and sign the necessary documents before a consular officer.
Can I change my mind if I renounce my citizenship?
Renouncing U.S. citizenship is an irrevocable act, meaning once completed, it cannot easily be undone. It is a serious and permanent decision that should not be taken lightly.
What do I need to know about my back taxes if I'm going to renounce my U.S. citizenship?
To renounce U.S. citizenship, you must be tax compliant. You must certify that you have met all federal tax obligations for the five years preceding expatriation. Demonstrating tax compliance is necessary to avoid penalties and ensure a smooth renunciation process.
After renouncing, will I no longer be a U.S. tax resident?
Yes, after renouncing your U.S. citizenship, you will no longer be a U.S. tax resident. You will no longer be subject to U.S. tax obligations on your worldwide income. However, you may still have to fulfill certain tax obligations for the year you renounce, including filing a final tax return and Form 8854 to certify compliance with U.S. tax laws for the five years preceding your renunciation. Additionally, if you have any remaining U.S. source income, you may still need to file a U.S. tax return as a non-resident.
If I have significant foreign assets, will I have to pay the exit tax?
Individuals with significant foreign assets may be subject to the exit tax. Understanding and reporting foreign assets accurately is crucial for calculating potential tax liabilities upon renunciation.
What citizenship documents will I need to renounce my U.S. citizenship?
Documentation such as birth certificates, naturalization certificates, and passports are required to prove U.S. citizenship and facilitate the renunciation process. Proper documentation ensures the legal process is followed correctly.
What is the Nationality Act?
The Nationality Act, specifically the Immigration and Nationality Act (INA) of 1952, is a comprehensive U.S. law that governs immigration and citizenship. It outlines the rules and procedures for naturalization, the rights and responsibilities of U.S. citizens, and the grounds for losing or renouncing citizenship. The INA has been amended multiple times to address changing immigration patterns and policies.
Summary of Key Points
- As of 2024, Renouncing U.S. citizenship involves a government fee of $2,350 and potential tax implications, which may include an exit tax for individuals with substantial assets.
- Consulting with a cross-border financial advisor, accountant and lawyer is essential to fully understand the financial and legal ramifications of renouncing citizenship.
- There is an emotional cost to consider, as renouncing citizenship can sever a lifelong connection to the U.S.
- S. citizens living abroad often consider renunciation due to the complexities and costs of maintaining U.S. citizenship while residing in another country.
- It's advisable to seek professional advice to explore alternative strategies for managing cross-border financial issues without necessarily renouncing U.S. citizenship.
Next Steps
If you’re a Canadian resident or are planning on moving to Canada or the U.S. and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management.
Read More
If you’re planning a cross-border move, these articles and guides will help simplify your move and ensure you’ve covered everything.
What to Do with US Mutual Funds in Canada
Renouncing US Citizenship: Pros, Cons, and How It Works
Cross-Border Estate Planning Guide
Certified Financial Planner in Canada - Finding a Fiduciary
About the Authors
Tiffany Woodfield is an Associate Portfolio Manager licensed in Canada and the USA, a Chartered Investment Manager (CIM), a Chartered Retirement Planning Counselor (CRPC), a Trust and Estate Practitioner (TEP) and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together, Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams to keep their assets safe whether they live in Canada or the U.S.
John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.
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