Renouncing your U.S. citizenship is a decision that should not be taken lightly. It is not reversible, and it is the voluntary loss of citizenship, meaning you will no longer hold a U.S. passport or be able to easily enter and exit the country, or live in America, easily again. For U.S. citizens who are living and working abroad with no plans to return to the United States, this decision can have beneficial tax implications. The Orange County expat tax attorneys at Evolution Tax and Legal are breaking down citizenship renunciation: the process, the benefits, and other important things to know before making this decision.
How To Renounce U.S. Citizenship
In order to renounce your U.S. citizenship, there are a few documents you will need to obtain before beginning the process. You will need to obtain a non-U.S. passport, to prove you have citizenship elsewhere. If you do not obtain a new passport before applying to renounce your U.S. citizenship, your application will be denied. This is to avoid any citizens being rendered “stateless” which would make it extremely difficult to obtain a new passport, rent or buy property, work, travel or receive medical services.
You will also need to fill out a number of forms prior to beginning the process. The primary forms include:
- DS-4079: Request for Determination of Possible Loss of United States Nationality
- DS-4080: Oath of Renunciation of the Nationality of the United States
- DS-4081: Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U.S. Citizenship
- DS-4082: Witnesses’ Attestation Renunciation/Relinquishment of Citizenship
- DS-4083: Certificate of Loss of Nationality of the United States
These forms can be completed prior to any renunciation appointments, but should not be signed until the appointments, so they can be notarized and witnessed by your interviewer.
After gathering your new passport and the forms mentioned above, you will be able to schedule your renunciation interview. This interview will take place at a U.S. embassy or consulate in a foreign country and it must be attended in person. You will need to bring other documents to this appointment, including your U.S. passport or birth certificate. At the appointment, an official will review your documents and interview you to ensure you are acting voluntarily. Once approved, you will pay the renunciation fee and file your final tax return as a U.S. person.
How Much Does It Cost To Renounce U.S. Citizenship?
The State Department charges a renunciation fee of $2,350 to anyone who is approved to renounce their citizenship. On top of that fee, depending on your income or qualifications, you will likely have to pay taxes one final time to the IRS.
Do I Have To Pay Taxes if I Renounce My Citizenship?
Once you have renounced your citizenship, you will not be obligated to pay yearly taxes to the U.S. government. You will be required to pay any outstanding tax debts in your final tax return. If you qualify, you may also be required to pay the exit tax.
Tax Implications of Renouncing U.S. Citizenship
Outstanding Income Tax Debts
In order to renounce your citizenship, you need to have been tax compliant for at least five years prior to your renunciation. This means that each year for the five prior years you have filed an income tax return and paid any tax debts owed each year. If you have not done this, you are able to file without consequence under the IRS amnesty program. Individuals can file through the Streamlined Filing Compliance Procedures, which were designed to help expats become tax compliant without penalties, as long as they certify that they failed to file because of ignorance rather than willfully refusing, file the last three delinquent income tax returns with the IRS and pay any tax debts owed with interest, and file an FBAR, Foreign Bank Account Report, for the past six years. Once this is completed, an individual is considered tax compliant and is able to complete the renunciation process.
The Exit Tax is a tax that covered expats are required to pay upon renouncing their citizenship. This is considered a final bill for capital gains that have not yet been taxed, such as homeownership or funds in a retirement account. The exit tax calculation can be complicated, and is usually calculated by treating your assets as if you have sold them at fair market value and taxing unrealized capital gains accordingly. However, some items are taxed differently and the rules can be complicated. We recommend working with a tax professional to determine if you are required to pay the exit tax and if so, how much.
Expat Gift Tax
Aside from the exit tax, if you are a covered expat it could impact your ability to gift to U.S. citizens after renouncing your citizenship. Under U.S. tax law, if a U.S. person receives a gift from a covered expat exceeding the $15,000 annual exclusion, the gift is taxed at the highest gift tax rate, which in 2022 was 40%. This tax will be paid by the person who has received the gift, rather than the expat.
Covered vs. Non-Covered Expatriates
The IRS considers certain individuals to be “covered” expats, which requires them to pay the exit tax and requires individuals who receive a gift from them to pay the expat gift tax, if they meet certain requirements. If an individual has a personal net worth of over $2 million, has an average taxable income over the previous five years that exceeds a set threshold, which was $178,000 in 2022, or has failed to indicate on Form 8854 whether they have filed and paid income taxes over the past five years, they are considered a covered expat. Non-covered expats are not required to pay the exit tax or the expat gift tax.
Difference Between Renouncing and Relinquishing U.S. Citizenship
An individual voluntarily has to apply for a renunciation of their citizenship, while relinquishing U.S. citizenship occurs when an individual does a relinquishing act, such as obtains citizenship to another country or joins another country’s military. In relinquishing U.S. citizenship, no formal notification needs to take place for the U.S. citizenship to be lost.
Can You Regain U.S. Citizenship After Renouncing It?
No, the decision to renounce your U.S. citizenship is permanent and you will not be able to get it back once the process is completed. The only exception for this rule is if an individual has renounced his or her citizenship prior to their 18th birthday and they contact the state department within six months of their birthday to request U.S. citizenship.
How Long Does Renouncing U.S. Citizenship Take?
Renouncing your U.S. citizenship requires gathering of many documents, filling out forms and then making appointments and waiting for approval. While the process can take longer, individuals are usually able to renounce their citizenship officially within 3-6 months.