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What should you consider before renouncing US citizenship in 2023?

The United States of America is a powerful country, and its citizens enjoy a lot of privileges that many in the world do not.

But it also comes with many drawbacks, which lead many to make the decision of renouncing US citizenship.

Section 349(a)(5) of the Immigration and Nationality Act states that any U.S. citizen has a right to renounce his or her citizenship by voluntarily “making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State,” and by signing an oath of renunciation.

There are many reasons why people would want to do this.

They could be tired of paying taxes in two countries at once; they do not want to be burdened with the legal complications that come with it; or perhaps they just think that living abroad is going to be more enjoyable than staying home in America.

There are also many downsides to renouncing US citizenship.

In this article, we will discuss these benefits and drawbacks in detail so that readers can make an informed decision about whether or not renouncing US citizenship is right for them personally.

If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

Why should you consider renouncing US citizenship?

There is no doubt that US citizenship is an incredible privilege — but it also comes with many responsibilities and obligations.

For example, if you are a US citizen and your spouse becomes a citizen of another country, you may be required to file taxes in both countries.

In addition, US citizens are required to pay taxes on income earned anywhere in the world (including from investments).

Many people become US citizens because they want to live in the United States, but not everyone born within the States wants to be American. Renouncing citizenship can be an attractive option for those who no longer want to do so.

There are many reasons why a person might choose to renounce his or her US citizenship. In most cases, this will make it easier for them to conduct business in their home country or region.

Having dual citizenship can be problematic when living abroad. If you are living abroad and do not plan on returning to the U.S., then renouncing could help eliminate tax obligations and simplify things if/when your status changes (e.g., getting married).

If you are considering renouncing your US citizenship, it is important to understand the benefits and drawbacks of this decision.

Proponents of renunciation have long argued that the United States is abusing its power by forcing those who live outside its borders to pay taxes on their worldwide income while prohibiting them from voting in elections.

Critics of the practice point out that renouncing your American citizenship is not as simple as most people think it is.

Before you can renounce your U.S. citizenship, you must first prove that you have another nationality and that there are no legal restrictions preventing you from giving up your American passport.

This means that if your parents were born abroad but never applied for foreign passports for themselves (as is common practice in some countries), and then became US citizens with their own passports, then their children may not be able to give up their U.S. passports until they reach the age of 18.

They will then need to apply for them on their own behalf—and even then, depending on where they were born and when this happened, there could still be some restrictions preventing them from doing so.

What are the benefits of renouncing US citizenship?

Freedom from US tax responsibility for non-covered expatriates.

You will no longer be a US taxpayer, and thus no longer bound by the US tax system.

Perhaps the biggest, and most common reason people renounce their US citizenship, is that non-US citizens will no longer be subject to US tax laws, which can be quite complicated and confusing at times.

The fact that you no longer have to pay taxes on your worldwide income is either good news or bad news for you.

After the date of your expatriation, you are considered an alien and are no longer required to file and pay taxes as a US citizen, while you will still be responsible for paying tax on enterprises conducted within the United States.

If you renounce your citizenship, you will no longer be required to file tax returns in the United States. You will no longer be required to file a US tax return, complete Form 5471 for foreign corporations, or file Form FBAR to disclose foreign financial accounts.

Unless it comes from within the United States, you have no obligation to file a tax return in the United States. Reduced compliance burden equals less stress and more time for other priorities.

This also implies you are safe from the effects of the recently enacted tax reform’s new provisions, which make it difficult to indefinitely live abroad and retain earnings.

As such, you will also not be subject to any future tax legislation that the United States may enact. You will not have to deal with any unpredictability with the US government when they retroactively assess a thirty-year tax bill, for instance.

As far as the IRS is concerned, you will no longer be a concern and will be out of their books. In addition to this, you will be able to fill in any blanks across various tax systems.

Renouncing US citizenship is an irreversible decision, and much care and consideration is needed before going through with it
Renouncing US citizenship is an irreversible decision, and much care and consideration is needed before going through with it. | Photo: Pixabay

For instance, dual nationals of the United States and Canada frequently face the issue that certain tax provisions in Canada do not correspond to those in the United States.

A person moving to Canada typically is not looking to evade taxes. They are contributing significantly to the levied funds of the Canadian government, and can streamline their tax condition by renouncing US citizenship.

There are also other gaps in taxation systems around the world. For instance, in the United Kingdom, money earned from gambling is not subject to tax. But if you are a US citizen who wins big in a UK casino, Uncle Sam will expect his share of the winnings.

When you renounce, you will not need to research the taxation policies of each country, determine which foreign tax credits can be used to offset other taxes, or worry about whether the United States will accept those credits.

To find out if you are a “Covered Expatriate” or a “Non-Covered Expatriate,” you must complete Form 8854 together with your final tax return after relinquishing your US citizenship.

A Covered Expatriate may have to pay an exit tax when they return home. The IRS wants its money up front to make sure you are not renouncing citizenship to escape paying a lot in US taxes. To avoid paying the exit tax and qualify as a Non-Covered Expatriate, you must satisfy the following conditions.

For the five years prior to the year you renounce your citizenship, you must have filed federal income tax returns.

You cannot have spent more than ten of the last fifteen years in the United States if you are a dual citizen and are taxed as a resident of the other country (for example, if you were born in the United States to parents who are citizens of the United Kingdom and you now live in the United Kingdom and pay taxes in the United Kingdom).

You must achieve all of the following requirements in addition to the first if you were not born a dual citizen:

  • Your net income tax liability cannot be more than the average of the prior five years, which is $172,000.
  • You can give up to $164,000 (in 2022) to a nonresident foreign spouse annually without paying a US gift tax, but your total net worth, including retirement funds and real property in the United States and abroad, must be less than $2 million on the date you renounced.
  • Jointly owned assets with a nonresident foreign spouse will be counted as half of the total value for purposes of calculating your net worth.
  • Form 8854 can only be filed for the tax year in which citizenship was relinquished.
  • Any deemed gain on real estate, equities, bonds, partnerships, etc., owned by a covered expatriate may trigger a departure tax. You can choose to forego any tax treaty benefit on these items and have the distributions taxed at 30% when you cash them out, or you can elect to have received a full payout the day before your renunciation and be taxed accordingly on Form 1040.
  • Keep in mind that if you hold any US-based property, investments, or financial assets after your renunciation, you may still be subject to US tax filing requirements (and, by extension, US tax).

When you renounce your U.S. citizenship, you are not required to sell any of your U.S. assets or investments.

Another perk of giving up US citizenship is that it disproves a common misconception about expatriation. The common misconception is that when you renounce, you have to uproot your life and leave everything behind.

Many Americans who move abroad leave behind financial assets, including stocks and rental homes. The reality is that an expatriate can keep their money in the United States despite the fact that they still have to pay taxes on this.

If you have settled into a financial relationship in the United States, you need not worry about being compelled to change banks.

The money you deposit in a US bank will earn interest free of taxation.

Many people who have given up their US citizenship nevertheless see the value in investing in the country’s economy.

Investments made in the United States by non-resident aliens who anticipate earning only capital gains and/or interest income are generally exempt from U.S. taxation (subject to certain limitations).

The tax burden could be significantly reduced if the taxpayer is located in a jurisdiction that does not impose taxes on capital gains or interest.

Due to your new status as a non-resident alien (NRA), all transactions involving your US-based interests or assets must be recorded using Form 1040NR rather than the regular 1040.

The following applies to any assets you have in a US account:

  • The value of any stocks, mutual funds, bonds, or other capital assets you own as of the day before you renounced will be used as the new cost basis for those holdings.
  • By submitting form W-8CE, you can let your financial institutions and brokerage firms know of your new identity.
  • An annual statement detailing your interest, dividends, and capital gains will continue to be sent to you.
  • Any money you make from US sources must be reported on Form 1040NR.

If you are a resident of a country with which the United States has a tax treaty, that country’s tax laws will apply to you instead of the United States’.

Unless specifically specified in a tax treaty, non-business related income will be subject to a tax rate of 30%.

The IRS tax tables are used to determine how much of a tax must be paid on business income. It follows the same tax brackets and rate structures as Form 1040.

Those who are eligible can still get Social Security payments, even as a non-citizen.

It is crucial to grasp the regulations and exceptions of US Social Security, as there are unique rules for NRAs. But in most cases, you can start collecting Social Security retirement benefits after making contributions for 40 quarters.

In most cases, Non-Resident Aliens (NRAs) are permitted to continue receiving US Social Security benefits in the same manner as if they had never become NRAs. This is contingent upon a number of variables, including the existence of bilateral agreements between the United States and the country in which you currently reside and/or are a citizen.

After living outside the US for 6 months, you may receive a modest tax adjustment or have your payments stopped altogether.

However, even if the latter occurred and your payments were stopped, all you would have to do to resume receiving them would be to spend every sixth month in the United States.

Unless you are getting your benefits as a dependent or survivor, for example, if you are a citizen of one of the nations listed below, you may continue to collect payments as long as you are outside the US. (The Social Security Administration will ask you to do more if this is the case.)

The countries on this list are: Albania, Antigua and Barbuda, Argentina, Bahama Islands, Barbados, Belize, Bolivia, Bosnia and Herzegovina, Bulgaria, Brazil, Burkina Faso, Colombia, Costa Rica, Côte d’Ivoire, Croatia, Cyprus, Dominica, Dominican Republic, Ecuador, El Salvador, Gabon, Grenada, Guatemala, Guyana, Hungary, Iceland, Jamaica, Jordan, Latvia, Liechtenstein, Lithuania, Macedonia, and Malta.

Unless specific restrictions apply, payments to those who renounce US citizenship but are not nationals of one of the above countries will expire after they have been outside the US for six complete calendar months.

Maintaining US residency is a frequent strategy for expats to keep their eligibility. You can keep getting paid frequently if you live in one of these top destinations for foreigners:

Australia, Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, South Korea, the Netherlands, Norway, Poland, Portugal, Spain, Sweden, and the United Kingdom.

Cuba, North Korea, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam are only some of the nations where Social Security payments cannot be sent.

NRAs do not get any of their accrued unpaid payments after leaving these countries, whereas US citizens do.

Mental and personal freedom from American values

Another benefit of renunciation is the mental and emotional feeling of liberation from coming with the baggage of being a citizen of the most powerful nation on Earth. This reason may not be as material as some others, but it is no less valid.

People who renounce their US citizenship because of a difference in ideology or politics or any other personal reason no longer need to carry the burden of false patriotism for a country to which they feel no allegiance.

What are the drawbacks of renouncing US citizenship?

One of the biggest disadvantages of giving up US citizenship is the loss of eligibility to work in the United States.

Although some nations are relaxing their immigration policies, many wealthy nations are taking the opposite tack. It is extremely difficult, if not impossible, to find work in the United States if you are not a citizen.

Especially if you have high-paying work abroad, you should think about how this lack of access may affect your standard of living.

Do you think you will be able to find and retain long-term work after renouncing your citizenship? Can you retire or start a business if you do not start saving immediately?

Job opportunities are likely to be slimmer in some countries than they are in the USA. Conversely, there are also some countries with many high-paying options for expats. It depends on your skills and where you are thinking of working for the long-term.

If you renounce, the worst situation will be to find yourself in a position where there is no job market to which you may turn.

You can no longer travel with a US passport, and after you renounce, you will require a visa to visit the United States and your friends and relatives there if you are not a citizen from a nation in the Visa Waiver Program.

Other considerations you should take into account is that you will not be able to claim any US government benefits such as social security payments or Medicare benefits unless you’ve paid into them for 5 years prior to renouncing your citizenship status.

Nor will you be able to vote in national elections or run for public office unless allowed under local laws governing non-citizen residents (which varies from state-to-state).

What else should you know before you renounce your US citizenship?

Expat tax obligations must be settled before renouncing citizenship.

It is important to check your expat tax status before executing the renunciation process by visiting your local U.S. embassy or consulate and swearing an oath.

Some people may believe that if they renounce their U.S. citizenship, they won’t have to make up any back taxes to the United States.

Before you can renounce, you must settle any outstanding expat tax obligations and bring yourself into full compliance.

According to the U.S. Department of State, renunciation of U.S. citizenship does not absolve a person of responsibility for past or future tax offences, such as failure to pay U.S. or foreign child support obligations.

Using the simplified processes will help you get back on track and avoid additional U.S. tax fines.

To be eligible for the program, one must, among other things, have a valid Social Security Number, have not acted willfully, and have spent at least 330 days outside the United States in one of the preceding three years.

It is not cheap to relinquish your citizenship.

There is an initial charge required to renounce citizenship. The fee to renounce your U.S. citizenship is $2,350. No exceptions will be made to this fee.

Additionally, if you are a “covered expatriate,” you may be required to pay an exit charge on gains from worldwide assets. You can qualify if you had more than $2 million in income from the date you expatriated, had an average yearly net income tax of more than $172,000 in the five years before to moving overseas, etc.

If you think you meet the criteria for a covered expatriate, it is in your best interest to consult with an expat tax professional to learn about your alternatives.

Your American passport will no longer be valid.

Keep in mind that if you renounce your U.S. citizenship while living overseas, your passport will be cancelled. The final verdict will leave you “stateless” unless you have foreign nationality or a foreign passport.

Being stateless can make simple tasks like traveling, buying a property, or even entering the United States difficult. Losing your citizenship can mean losing your right to work and receive stimulus money in the United States. If you’re thinking of giving anything up, keep these things in mind.

The decision to renounce cannot be undone.

The only way to sever ties with the United States is to pay all outstanding taxes as an expat, appear before a U.S. consular or diplomatic officer, pay the renunciation fee, and take an oath. But once you renounce, you’ve given up forever. Regaining your citizenship is a permanent and final decision.

If you abandoned your citizenship before turning 18, however, you will not be eligible to regain it. Then, within six months of turning 18, you can file an application with the Department of State stating your desire to regain U.S. citizenship.

If you are an expat and need assistance filing your U.S. taxes, there are a number of options available to you, and there may be additional benefits (beyond compliance) to doing so.

If you are a U.S. citizen living abroad, you can find a range of expat tax software applications to assist you in completing your tax return. Using this type of program, you can meet all of your tax obligations in record time.

Having U.S. citizenship opened the door for people all around the world to get stimulus checks whatever their location, just as it did during the pandemic.

Ultimately, renouncing US citizenship is a personal decision, regardless of taxes, finances, or any other variable.
Ultimately, renouncing US citizenship is a personal decision, regardless of taxes, finances, or any other variable. | Photo: Pixabay

The United States is one of just a few countries that distribute money through the mail to its citizens. Therefore, losing your U.S. citizenship prevents you from receiving stimulus funds that could come in handy in the event of worldwide pandemics or other calamities.

Furthermore, the Child Tax Credit allows qualifying families to receive up to $1,400 in tax refunds from the United States government even if they have no U.S. generated income and do not owe any U.S. taxes.

This credit provides an additional method by which families with members working overseas can reduce their taxable income.

If you’re having trouble paying taxes as an expatriate, it’s especially important to understand the repercussions of giving up your U.S. citizenship.

Spending an hour once a year to file your taxes and perhaps obtain returns and advantages from the IRS could be more worthwhile depending on your situation.

Consider seeking the services of an expat financial advisor

An expat financial advisor, who specializes in helping those like you who are living overseas for an extended period of time, can make the process of understanding your financial obligations before renunciation much easier.

When it comes to foreign tax preparation and compliance, a qualified financial advisor can be a useful resource for someone residing overseas.

Moreoever, a seasoned financial advisor can help you navigate the financial landscape of an international setting and make informed decisions.

Hiring one is an option to think about if you are having problems keeping track of your money. Finding a financial advisor who has experience working with expats might be a big help if you don’t currently have one.

A seasoned expat financial advisor can ease your transition to your new home and help you get your foreign tax affairs in order. They’ll listen carefully to learn about you and your position before making any suggestions.

An expat financial counselor can assist you in ways that a regular financial advisor cannot.

Your financial goals and tolerance for risk should inform the advice you receive from your advisor. They may assist you in developing a personal financial strategy, overseeing its execution during good times and bad, and maximizing the value of your savings.

Financial advisors help clients save money by pointing them in the direction of the correct insurance policies and investments.

To sum up, an advisor may be the best person to help an expat who wants to invest but has no idea where to begin or what questions to ask (or if investing is even good for them).

You can get assistance with tax planning and other financial security-related matters by consulting with an expat financial counselor.

They can assist you prepare your taxes so that you pay as little as possible in taxes. As part of this service, we may advise you on how to structure your foreign income to avoid double taxation.

Depending on the type of entity established, this could also involve establishing a company or trust that permits savings to grow while minimizing tax liability.

Retirement planning is another area where the assistance of an expat financial advisor can be invaluable. These plans take into account the client’s risk tolerance, the amount of money they expect to need during retirement, and the timing of their retirement.

Establishing objectives is the starting point for any retirement strategy. Once you know how much you want to put away, you may decide how much of your portfolio should be placed in stocks and bonds and how much should be kept liquid in case of emergencies.

A financial advisor who specializes in helping expats can design a strategy to get you where you want to go.

The selection of investments most suited to your risk tolerance and other demands is only one area where an expat financial advisor can be of assistance during retirement planning.

One could need more hands-on assistance than someone who is comfortable managing their own portfolio if they have an ambitious investing strategy but no time to review their investments regularly or at all.

In fact, some advisors can collaborate with your present bank to provide enhanced services at reduced costs.

Advisors have a leg up on the competition because they have additional resources at their disposal, such as research reports from analysts who follow stocks or bonds all day long, allowing them to provide timely, relevant advice to clients.

You should seek out a competent financial advisor. Make sure they are familiar with banking and investing across borders if you are planning to live abroad.

If you want to retire or send your children to school in a foreign country, you should consult with a financial advisor who is familiar with the local economy and can help you make wise investment decisions.

Bottom line

There are a lot of reasons to consider giving up your US citizenship. The most obvious one is if you live overseas and have no desire to return to the United States, or if you plan on living in the US but would rather not be subject to its tax laws.

Overall, there are benefits to renouncing that are worth considering if you are a high-level entrepreneur or investor who is certain in the direction you are going.

Those who no longer have any financial ties to the United States and have no intention of ever working or investing there might consider renunciation.

But it would not make sense to renounce if you’re just starting out in business and don’t have much saved up, or if your money is in a highly unstable investment like cryptocurrency. You have no safety net to fall back on if things go wrong.

If you have no other source of income but from US-based investments like US equities and real estate, renouncing your citizenship could actually result in a higher tax bill.

When making the decision to renounce US citizenship, too many people do so on the basis of emotions. However, you should approach this choice with a clear mind.

There is a lot to consider when it comes to renouncing US citizenship. If you’re thinking about doing this, be sure that you know what it means for your future and that you have a plan in place before deciding on this drastic step.

The process itself can be complicated and time-consuming as well.

It also requires legal assistance from an expert who understands all of the potential issues related with such situations so that everything goes smoothly when filing the necessary paperwork.

Pained by financial indecision? Want to invest with Adam?

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Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

This website is not designed for American resident readers, or for people from any country where buying investments or distributing such information is illegal. This website is not a solicitation to invest, nor tax, legal, financial or investment advice. We only deal with investors who are expats or high-net-worth/self-certified  individuals, on a non-solicitation basis. Not for the retail market.



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