What are the benefits for expats of renouncing US citizenship? That will be the topic of today’s article.
An increasing number of American expats are looking to renounce their citizenship for convenience and tax reasons, with a record number doing so in 2020.
Another group of Americans living locally in the US are also considering offshoring their assets and renouncing.
This article will therefore speak about some of the drawbacks and positives associated with taking such actions.
If you are looking to invest in expat-specialised solutions or have any questions, don’t hesitate to contact me, email ([email protected]) or use the WhatsApp function below.
Nothing written on this article should be considered as legal, tax or any other sort of advice.
Introduction
After examining the facts below, you will find out why the number of Americans or American expats, who are deciding to renounce their US citizenship, grows with the time and what benefits they can get from it, or does the process can bring and disadvantages and any negative impact.
You will also find out what will happen when giving up an American passport, and much more in this article.
As we all know from school times, immigration is the movement of people to a destination country, where they are not considered as citizens, in order to settle and live there with the prospect of becoming naturalized citizens in a few years.
To accelerate the process of obtaining citizenship abroad, economic citizenship programs allow, according to the conditions of which, foreigners need to make a significant contribution to the economy of host countries to obtain passports of such states.
Where can you get economic citizenship? There are many places to choose from. Malta, Cyprus, the Caribbean, Turkey, Vanuatu – it all depends on your needs, financial capabilities and a number of other factors.
The list of Americans who have renounced US citizenship for the sake of one or another alternative is getting longer.
In a legal language, section 349 (a) (5) of the Immigration and Citizenship Act details the right of a US citizen to renounce his citizenship by voluntarily “making a formal renunciation of citizenship before a diplomatic or consular officer of the United States. Foreign country in such a form as may be prescribed by the “Secretary of State”, and by signing an oath of non-participation.
After a record high of 5,411 in 2016, the number of Americans and American expats renouncing U.S. citizenship has dropped to 3,983 in 2018, 22% less than 5,133 in 2017, according to the U.S. Treasury Department. But what does renunciation of citizenship entail?
Important key facts every citizen or expat should consider before renouncing US citizenship:
- Giving up U.S. citizenship means giving up all benefits, such as voting rights, government protection should you need help while abroad and citizenship for children born outside the United States.
- Renunciation is a lengthy process that involves extensive paperwork, interviews, and fees; it is also a process that is typically permanent — you can’t change your mind and regain your citizenship.
- Some Americans have renounced their citizenship because of new laws that require taxpayers to report foreign-held assets to the IRS, and to pay “double” taxes, both in the U.S. and abroad.
- Other people have renounced their citizenship for personal or political reasons, such as opposing a war that the country is engaged in or objecting to a political party or elected official.
- Under U.S. law, citizenship can be terminated for reasons such as becoming a citizen of a different country, fighting in a war for a different country against the U.S. or attempting to overthrow the U.S. government.
Citizenship renouncement process and impact
Now let’s review the points mentioned above. Renouncing citizenship can have serious consequences: you are giving up benefits to US citizens, including the right to vote in US elections, government protection and assistance when traveling abroad, citizenship for children born abroad, access to federal jobs, and unlimited travel to from country.
Moreover, renouncing is not as easy as throwing away your passport. This is a lengthy legal process that requires paperwork, interviews and money.
Due to an increase in the number of US citizens willing to renounce their citizenship, the US Department of State raised the surrender fee from $ 450 to $ 2,350, about five times the average in other high-income countries such as the UK. In addition, some high-income citizens may pay a capital gains tax called an “exit tax” (officially referred to as an expatriation tax).
It is important to understand that in almost all cases, refusal is irrevocable, which means that you will not be able to change your mind and regain US citizenship. Despite these (and other) consequences, more and more people choose to renounce US citizenship.
Why are there so many renouncements?
It can be very strange finding out that a lot of Americans want to renounce their citizenship, while thousand of people work hard to become a citizen of US. While the reasons for renouncing citizenship vary from one person to another, the recent spike in their number is largely due to newer tax laws, including the Foreign Account Tax Compliance Act (FATCA) of 2010.
According to the IRS, FATCA is “an important development in US efforts to combat tax evasion by US persons holding accounts and other financial assets offshore.”
FATCA focuses on reporting:
- US Taxpayers About Their Overseas Financial Accounts and Offshore Assets
- foreign financial institutions in relation to U.S. taxpayer financial accounts, or
- foreign organizations in which US taxpayers own a significant share of the property
According to the FATCA, some US taxpayers with financial assets outside the US totaling more than the reporting threshold must report their assets to the IRS using Form 8938, Statement of Certain Foreign Financial Assets (the threshold depends on your registration status and your residence. in the USA or abroad).
The IRS warns that there are “severe penalties for failing to disclose these financial assets.” It should be noted that FATCA requirements complement Form 114 Foreign Banks and Financial Accounts Statement (FBAR), a longstanding reporting requirement for foreign financial accounts. The penalties for non-compliance are significant and, in some cases, criminalize.
In addition to financial reporting requirements, there is the problem of double taxation. Unlike most countries, the United States has citizen-based taxation, meaning citizens are taxed no matter where in the world they live or where they received their income. While foreign tax breaks can reduce the tax burden, they do not eliminate all double taxes, especially for those with higher incomes who end up filing and paying taxes both in the US and abroad.
Current tax laws – and the accompanying reporting, filing, and tax obligations – have forced many Americans to renounce their citizenship, not only for money, but also because they find tax compliance and disclosure laws inconvenient, burdensome, and even unfair.
Another side effect of FATCA – and the requirement for foreign financial institutions to report US citizens’ accounts in the United States – is that many foreign banks don’t want to deal with American clients at all. As a result, many US citizens have been rejected by overseas financial institutions, which is frustrating if you live overseas and want to pay your bills.
Other reasons for renouncement
According to the history, Americans have sometimes renounced citizenship for other reasons. For example, opposition to US policy during the Vietnam War. Certain actions can also lead to the loss of US citizenship without formal renunciation. Under the Internal Revenue Code and / or the Immigration and Citizenship Act (see Title 8 of the United States Code), citizenship can be terminated (and therefore denied, but not denied) for several reasons, including:
- Applying and getting a naturalized citizen of another country
- I swear allegiance to another country
- Joining the armed forces of another country participating in the war against the United States, or joining the armed forces of another country as an officer
- Work for a foreign government while also being a citizen of that county
- Employment in a foreign government at work that requires an oath of allegiance, endorsement, or other formal declaration of allegiance
- Renunciation of U.S. citizenship during war with approval of the U.S. Attorney General
- Committing an act of treason or attempting to overthrow the U.S. government by force (and convicted by a military tribunal or civilian court)
The advantages of renouncing
The first benefit of opt-out is one that the media always cite: you can reduce your tax burden by giving up your US citizenship. This may or may not be beneficial to you, but you will no longer be taxed on your global income.
You will still have to pay US business tax, but from the date of your expatriation, you become a foreigner and are no longer required to file and pay taxes as a US citizen.
There is no such thing as “free from all taxes” —you will still be paying taxes somewhere — but giving up will help reduce some of that burden.
In addition to reducing the monetary burden of taxation, the refusal will also reduce the filing burden that all US citizens face. You will no longer need to file a U.S. tax return, fill out Form 5471 for foreign companies, or report your foreign bank accounts using Form FBAR.
In fact, you do not need to report your income in the US unless it comes from US sources. You will need to worry less about following the rules, which will free up your time and reduce your stress levels.
It also means that you don’t have to worry about new provisions introduced in the recent tax reform that make it impossible to reside abroad and non-distribution of profits indefinitely.
You also don’t have to deal with any new tax laws that the US may enact in the future. You don’t have to put up with what one client calls a “psychopathic friend” who cannot be predicted, and who decides to go back thirty years and ask for money with taxes after the fact.
You are forever out of the US tax system.
Along with this, you will also be able to fill any gaps in the various tax systems. For example, dual citizens of the United States and Canada often face a problem where certain tax provisions in Canada do not match those in the United States.
Someone living in Canada is not necessarily trying to avoid taxation. Many taxes are paid in Canada. Refusal allows them to simplify the tax situation. They don’t have to worry about what is taxed in each country and what is not, what foreign tax credits they can use to offset other taxes, and whether the US will allow them to apply those credits.
Many people have to deal with such gaps between the United States and various tax systems in countries around the world, not just Canadian citizens.
Another benefit of renouncing US citizenship goes against one of the biggest myths surrounding becoming an expatriate. Many people mistakenly believe that after renunciation you need to collect everything and take with you, but this is not always the case.
Many people who emigrate from the US have investments that remain valid, along with things like property rentals and stocks. They still have to pay taxes on them, which can be a tricky situation, but in reality expatriates can keep their money in the US. Once you’ve found a convenient banking location in the United States, you don’t need to worry about being forced to give up this banking relationship.
The advantage of this is that the interest you earn on money from the US bank is now tax-free.
Finally, a lot of people tell me that they just feel better using a different passport. They feel freer to travel as citizens of another country because they can do banking anywhere without worrying about having to comply with FACTA.
They feel lighter, freer, and may even enjoy the idea that they don’t need to feel patriotic about a place they don’t think was theirs.
The disadvantages of renouncement
The cons of giving up the United States includes everything from giving up voting rights to abandoning the visa waiver regime.
The biggest disadvantage of opt-out for most people is that they no longer have access to the US labor market.
While some countries are opening up their immigration procedures, many developed countries are tightening them. If you are not a US citizen, getting a job in the US will be very difficult, if not impossible.
This is why crypto investors looking to opt-out due to US cryptocurrency regulations. If the worst happens and the cryptocurrency drops to zero like a bullet, these people will need to find jobs as soon as possible.
And there will probably be fewer opportunities in Dominica or Armenia than in the US. People are not used to the idea that they have no job market, but that can be the case if you decide to give up.
Refusal means that it will be much more difficult for you to get to the USA, let alone find a job there. If you do not have a Canadian passport or citizenship of a country that has a Visa Waiver Program, you will need a visa to visit the United States and visit your family or friends.
This does not mean that it is impossible or that there is a campaign against people who have refused, but if you do not have all the necessary things to show that you must get a visa, it may be difficult for you to return.
Smaller disadvantages include:
- You cannot vote in elections.
- You will not be able to access consular protection if you are injured, beaten, or your wallet is stolen.
- You cannot receive emergency evacuation while in a war zone.
Does the advantages overcome the disadvantages?
The decision to refuse doesn’t have to be emotional. Before making a choice, consider the pros and cons of renouncement.
Overall, if you are a high-level entrepreneur or investor confident in the direction you are going to move, then there are some benefits of failure worth considering.
If you’ve recently taken up a business that hasn’t amassed much, or have some sort of volatile investment like cryptocurrency, giving up may not make much sense. If something goes wrong, you won’t have a pillow to fall back on.
There are even situations where a refusal could put you in a worse tax position, especially if all your money is made from American investments such as American stocks and real estate.
Refusal of the citizenship is better for those who no longer rely on the United States for money — they don’t invest there, they don’t work there, and they don’t plan to do the same in the future.
Too many people choose to relinquish their US citizenship with the emotional libertarian argument that they are going to show the government that they no longer pay for their wars. But this is a decision that needs to be made wisely.
It is not even recommended to rush into this process without understanding all the pros and cons and what they can get from it.
Renouncing your US citizenship but still retire?
With growing frustration over US taxes and FATCA, it’s not hard to see why many American expats are considering giving up their US citizenship. While this may surprise some, the US does not “punish” you for denying and revoking privileges that you have earned during your citizenship. You can renounce your citizenship, avoid future US taxes, and still receive the US income / benefits that you are entitled to.
Social security benefits such as retirement is usually available to those who are eligible.
There are specific US social security rules for NRAs, so it is important to understand the rules and exceptions. But in general, if you paid Social Security for a full 40 quarters, you will be eligible for post-retirement benefits.
As an NRA, you can continue to receive US Social Security benefits as if you were a US citizen. However, this is influenced by several factors: US bilateral agreements (or lack thereof), your current citizenship, country of residence, etc.
Depending on these factors, you may receive a small tax adjustment or your payments may be stopped after you are outside the United States for six months.
But even if the latter happens and your payments stop, you just need to return to the US for one full month (midnight to midnight) every six months to continue making payments.
To sum up
Today, tax laws are causing a record number of people to renounce US citizenship every year. But it’s not as easy as passing your passport through a shredder. Since the law states that those wishing to renounce US citizenship must do so in person at a US consulate or diplomatic mission while in another country, US citizens cannot renounce their citizenship by mail, through a third party, or while in the United States.
Renunciation has serious consequences. In addition to waiving benefits for US citizens, the US Department of State recommends that anyone considering renouncing US citizenship understand that in almost all cases the act is irrevocable. Exception: A person who renounces citizenship before the age of 18 may regain that citizenship by notifying the Department of State within six months of reaching the age of 18.
Renouncing citizenship is one of the most serious decisions anyone can make. Weigh carefully the pros and cons for yourself and your family. It is also recommended to consult with an experienced tax professional to understand the tax implications of a waiver.
Further Reading
I am the most viewed writer globally on Quora.com for financial matters, with over 223 million answer views in the last three years.
On the article below, taken from my Quora answers, I answered questions such as:
- Which investments seemed great many decades ago but are now worthless?
- Are tech stocks overvalued in 2021 or are we moving into a future which is completely tech-driven?
- Is investing in real estate really such a good idea if we factor in fees, taxes, hassles and risks? I compare investing in real estate versus the stock market, using the UK as an example.
To read more click below.
