With the advent of FATCA in 2010 and its onerous tax-related requirements, many US citizens living abroad have opted to expatriate and renounce their US citizenship.
According to research performed by international tax lawyer Andrew Mitchell, the growth in expatriation has been astounding since he first started collecting statistics in 2008.
Taking into account data released for the first quarter of 2016, Mitchell writes that “new records were set for the number of expatriates” with close to 3,000 in 2013, 3,415 in 2014 and 4,279 in 2015.
Furthermore, as quoted in a The Washington Post June 1st article, Mitchell’s research shows that “in the first quarter of this year, 1,158 people expatriated — more than 10 times the number in the first quarter of 2008.”
Given the potential penalties for failing to file plus all the additional paperwork to complete, many Americans living abroad have chosen expatriation. Keep in mind too that the US, along with Africa’s Eritrea, is the only country in the world that taxes its citizens for income received while living abroad.
Besides this process causing massive problems for Americans expatriates, the IRS has also been hindered as they now have more paperwork to process and data to comb through.
W. Gavin Ekins, a Researcher with Tax Foundation, says, “That mountain of data not only puts burdens on the individuals trying to comply, but that also puts a large burden on the IRS to go through the data,” adding that “the cost of actually finding a dollar of tax evasion may cost us $5 of actually sifting through the data and compliance costs.“
How to Renounce Your US Citizenship
So what’s involved in renouncing US citizenship?
If someone wants to give up their US passport, these are the basic steps to follow:
- Acquire a second passport or citizenship elsewhere. Individuals renouncing their US citizenship need to show proof of citizenship elsewhere.
- Complete form DS-4079: Questionnaire – Information for Determining Possible Loss of U.S. Citizenship and also review forms: 1) DS-4080: Oath of Renunciation of the Nationality of the United States; 2) DS-4081: Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U.S. Citizenship; 3) DS-4082: Witnesses’ Attestation Renunciation/Relinquishment of Citizenship, and; 4) DS-4083: Certificate of Loss of Nationality of the United States.
- Book a renunciation appointment at the US Embassy or Consulate.
- Go to the appointment in which, at the end, you’ll receive form DS-4083: CLN for Certificate of Loss of Nationality proving that you are no longer a US citizen.
- Once this process has been completed, file your final tax return (IRS forms 1040 and 1040NR) and IRS form 8854: the Expatriation Information Statement. The latter form has to be filled out by all individuals expatriating yet an additional section applies specifically to “covered expatriates” who have a net worth that surpasses $2 million (or an average annual net income tax of over $157 thousand for the five previous years) and might have to pay an exit tax upon renouncing US citizenship.
Albeit, the expatriation process outlined above can also be problematic.
First of all, the fee to be paid for giving up the US passport adds up to $2,350, a fee that is nowhere near the global average (excluding the US) of $205 for expatriation.
High-income countries such as the UK, New Zealand, Canada and Hong Kong only charge $239, $335, $91 and $76 for giving up their citizenships.
Furthermore, in order to be allowed to expatriate, individuals must swear that they have complied with their IRS tax payments for a period of 5 years by signing the aforementioned Form 8854.
Likewise, according to Robert W. Wood, a tax expert who writes for Forbes, “if you have a net worth greater than $2 million or have average annual net income tax for the 5 previous years of $160,000 or more, you can pay an exit tax.”
This tax, says Wood, is essentially “a capital gains tax, calculated as if you sold your property when you left.”
Despite these obstacles, though, it’s obvious a growing number of Americans are willing to sacrifice their US citizenship for the sake of less hassle come tax time.
Taxlinked member Jimmy Sexton of Esquire Group in Las Vegas has released a survey on expatriation and has asked individuals interested in or considering this option to submit their questions, which his firm will then follow-up with detailed answers. If you’re curious about US expatriation, please make sure to submit your questions HERE.
This blog post was updated on September 12, 2016.