Should American Expats Give Up Their U.S. Citizenship?

Submitted on | Sep 11, 2023

The Exit Tax

The laws governing the renunciation of U.S. citizenship were amended in 2008, under the Heroes Earnings Assistance and Relief Tax Act of 2008 (the HEART Act) and U.S. Treasury Notice 2009-85. These rules apply to both U.S. citizens and long-term U.S. permanent residents who have held green cards for eight of the last 15 years. Individuals in both categories who meet certain criteria are considered covered expats and are subject to an immediate exit tax on the unrealized gains of their worldwide assets.

A U.S. citizen or long-term permanent resident is considered a covered expat and subject to the exit tax if they meet any of the following criteria:

Have a worldwide net worth of USD 2 million or more
Had an average annual U.S. tax liability of more than USD 190,000 (inflation-adjusted) in the five years prior to expatriation
Have failed to certify compliance with all U.S. federal tax obligations in the five years prior to expatriation

Exceptions may apply to certain people who are dual nationals from birth and who have not lived in the U.S. for more than 10 out of the last 15 years. In addition, there are exceptions for those who are younger than 18½ and have not lived in the U.S. for more than 10 years.

What Happens When You Renounce Your Citizenship

The application of the exit tax can be complicated. We strongly advise that you seek professional help if you choose this route. In general, those giving up U.S. citizenship would have to obtain citizenship in another country, physically leave the U.S. and appear before a U.S. Consul, file Form 8854: Expatriation Information Statement, and pay any exit tax due.

Some other important facts about renouncing your U.S. citizenship:

The exit tax is applied to the net unrealized gains on the covered expat's worldwide assets (based on the asset's fair market value on the day prior to expatriation). No sale is required, but assets are valued according to the rules governing estate tax valuation.
In 2023, the first USD 821,000 (inflation adjusted) in gains are exempt from the exit tax. This exemption amount is applied pro rata to all assets. Any amount in excess of the exemption is subject to the exit tax.
The tax is due within 90 days of giving up citizenship.
Deferred compensation items such as pensions are subject to special rules. If the pension is payable by a U.S. payor, then it is considered an "eligible deferred compensation item." Rather than being subject to an immediate exit tax, a 30% withholding tax would be applied at the time of payment(s).
If the payor of a deferred compensation item is a non-U.S. person or entity that does not elect to be treated as a U.S. payor, then the net present value of the deferred compensation item would be calculated as of the day prior to expatriation and reported as income on the expatriate's income tax for the year of expatriation.
The withholding tax is not subject to reduction under any double taxation treaties between the United States and other countries.
If a covered expatriate makes a gift or bequest after expatriation that exceeds the annual gift tax exclusion of USD 17,000 (in 2023) to a U.S. citizen or resident (other than a spouse), the recipient must withhold tax at the highest marginal estate or gift tax rate at the time of the gift. This also applies to gifts or bequests to U.S. trusts.

Other Considerations When Giving Up Your U.S. Citizenship

Aside from the exit tax, there are a number of other important things to consider before you renounce your U.S. citizenship:

You will not be able to give up U.S. citizenship until you have obtained citizenship in another country. That may not be easy. Some countries offer the opportunity to essentially purchase citizenship, but it's not cheap. In other countries, the path to citizenship can be slow and arduous.
Renunciation of citizenship is difficult to reverse, if not impossible.
Your future travel to the U.S. may be restricted. You must first obtain a visa, but it can be denied.
A person who gives up U.S. citizenship and then spends more than 120 days a year in the U.S. may be considered a U.S. tax resident and subject to U.S. income tax on worldwide income. If you have already qualified for Medicare benefits, you do not lose these benefits, but you may lose access to them. Currently, Medicare does not cover medical treatment outside of the U.S. In theory, you could return to the U.S. for treatment, but you would likely have to apply for a visa. You would also need to be careful not to exceed the number of days in the U.S. that could make you a U.S. tax resident. If you are eligible to receive U.S. Social Security and you are either a citizen of certain countries or a resident of certain countries, you may qualify to receive Social Security benefits. Generally, though, you will no longer be paying into the Social Security system, which may affect your ultimate benefit calculation, and if you haven’t already qualified, you may never qualify. If you are eligible and qualify to receive Social Security payments, you may be subject to a withholding tax of up to 30%, depending on your situation. Aside from potential U.S. withholding tax, you may also be taxed by your new country of residence.
You will lose the right to federal financial aid if you ever return to the U.S. to pursue education.
You lose the protection of the U.S. embassy in the event of trouble in your new country.
The grass may not always be greener in your adopted country. You need to consider the country's tax regime, availability of financial services, health care and insurance, cost of living, inflation rates, legal protections and recourse, level of corruption, ease of travel, employment opportunities, and business formation costs and requirements.

For the average American expat who is frustrated with paying U.S. taxes and the increased burden of filing and regulatory compliance, it is worth completing a careful cost/benefit analysis. You may find that the price of U.S. citizenship is not as expensive as you thought.

Not That Prevalent

Despite the media hype and initial appeal, considering that the U.S. State Department estimates that 9 million US Citizens live abroad, relatively few actually give up their U.S. citizenship. It’s been widely reported that a recent peak of 6,707 people renounced their citizenship in 2020, although the numbers reported by the IRS and State Department tend to differ. Most people who go this route tend to be green card holders, dual citizens, or have resided abroad for an extended time. The exit tax rules are extremely complex, and there are several other issues to consider. After running the numbers, most people will probably determine that renouncing U.S. citizenship doesn't make sense. Still, if you have decided that this is the right course for you, be sure to enlist professional support.

This article is a revised and updated version of an article that originally appeared on www.crevelingandcreveling.com.

About Creveling & Creveling Private Wealth Advisory

Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.

Copyright © 2023 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.

Should American Expats Give Up Their U.S. Citizenship?