Renouncing U.S. citizenship

Frequently Asked Questions
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Index:

1. How to Renounce U.S. Citizenship?

Renouncing U.S. citizenship is a serious and formal process that requires careful preparation and understanding of the legal and financial implications. At 1040 Abroad, we aim to guide you through this process to ensure a smooth transition and compliance with all necessary regulations. Here’s a step-by-step breakdown of how to renounce your U.S. citizenship:

How to renounce us citizenship

STEP 1: Obtain a Second Passport

To renounce your U.S. citizenship, you must first obtain a second passport or citizenship from another country. This requirement is in place to prevent statelessness, a condition the U.S. has been committed to reducing and preventing since 2021. Without a second passport, your renunciation request will be denied. Statelessness can lead to severe hardships, such as difficulties with travel, obtaining a new passport, renting property, finding employment, and accessing medical services.

STEP 2: Prepare the Renunciation Forms and Required Documents

Before your renunciation appointment, you must complete the required forms. Depending on the U.S. embassy or consulate, the necessary forms may include:

  • Form DS-4079: “Request for Determination of Possible Loss of United States Nationality”
  • Form DS-4080: “Oath/Affirmation of Renunciation of Nationality of United States”
  • Form DS-4081: “Statement of Understanding Concerning the Consequences and Ramifications of Renunciation or Relinquishment of U.S. Nationality”

Some embassies will require you to bring pre-populated forms, while others might require you to complete the forms in front of the consular officer. Therefore, it is advisable to familiarize yourself with the forms and check with your specific embassy or consulate for the required documents. It is also important to understand the legal requirements for renunciation.

Additionally, ensure you are tax compliant for at least the five years preceding your renunciation. This includes filing all required U.S. tax returns and reports (such as FBARs) and paying any outstanding tax debts.

Important: The statute of limitations for FBAR is six years.

If you have not been tax compliant, you will need to prepare and file your delinquent tax returns. Our Renunciation Package can help you achieve compliance within two weeks.

Along with the necessary forms, gather other required documents such as:

  • Evidence of U.S. citizenship (e.g., U.S. passport, birth certificate)
  • Foreign passports
  • Name change certificates (if applicable)
  • Any other relevant documentation

Having all these documents prepared and organized will ensure a smoother renunciation process.

STEP 3: Book and attend your Renunciation Appointment with a Diplomatic or Consular Officer

Once you have all your documents prepared, you need to schedule an in-person appointment at a U.S. embassy or consulate abroad. Renunciation cannot be done by mail or while you are in the United States; you must appear before a U.S. consular or diplomatic officer. This process may involve taking an oath, making an affirmation, or other formal declaration of allegiance to a foreign state or political subdivision thereof.

To schedule your appointment:

  1. Contact the Embassy or Consulate: Reach out to the U.S. embassy or consulate nearest to you to schedule an appointment. Be prepared to provide the necessary details and documents.
  2. Check Waiting Times: Waiting times for appointments can vary significantly depending on the location. If the waiting list is particularly long at your nearest embassy or consulate, consider scheduling an appointment in another city or country where the wait might be shorter.
  3. Prepare for Your Appointment: Ensure you bring all the required documents and forms to your appointment. You will need to pay the renunciation fee of $2,350 at the time of your appointment.

During the appointment, you will:

  • Appear In Person: Attend the appointment in person at the scheduled time.
  • Pay the Fee: Pay the renunciation fee of $2,350.
  • Undergo an Interview: The consular officer will conduct an interview to confirm that your decision to renounce your U.S. citizenship is voluntary and that you understand the consequences of relinquishing your nationality. You will sign the oath of renunciation (Form DS-4080 and DS-4081).

Attending this appointment is a crucial step in the renunciation process, as it ensures your decision is made willingly and with the full understanding of its implications. 

Step 4: State Department Approval

After your renunciation appointment, your case will be forwarded to the State Department for final approval. This review process typically takes several months. The Department of State will evaluate your case to ensure all legal requirements have been met and that your decision to renounce is informed and voluntary.

Step 5: File Your Final Tax Return

Even after you renounce your U.S. citizenship, you have one final obligation to the IRS. You must file a final U.S. tax return for the year of your renunciation, which includes Form 8854, “Initial and Annual Expatriation Statement.”

  1. Final U.S. Tax Return:
    • File a dual-status tax return for the year of renunciation. This return will include a part-year tax return for the period you were a U.S. citizen and a part-year return for the period after renunciation.
    • Report all income earned up to the date of renunciation.
  2. Form 8854:
    • Complete and submit Form 8854 to certify that you have complied with all U.S. tax obligations for the five years preceding your renunciation.
    • This form is crucial as it informs the IRS of your expatriation and provides information on your net worth and tax liability.

By fulfilling these final tax obligations, you complete the process of renunciation and officially end your status as a U.S. taxpayer. Ensure that all forms are accurately completed and submitted to avoid any future complications with the IRS.

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2. What Are The Tax Implications Of Renouncing U.S. Citizenship?

Renouncing U.S. citizenship has several significant tax implications that must be carefully considered. Here are the key points:

  1. Tax Compliance for the Previous 5 Years:
    • You must be fully tax compliant for the five years preceding renunciation. This means filing all required U.S. tax returns (including FBARs) and paying any outstanding tax debts. Failing to certify tax compliance can trigger the “exit tax.”
  2. Exit Tax:
    • The exit tax applies if you meet any of the following criteria:
      • Your net worth exceeds $2 million on the renunciation date.
      • Your average annual net income tax liability for the past five years exceeds $190,000 (for 2023, adjusted for inflation).
      • You fail to certify tax compliance for the preceding five years.
    • The exit tax treats you as having sold all your worldwide assets on the renunciation date. You are taxed on any unrealized gains exceeding $821,000 (for 2023).
  3. Final Dual-Status Tax Return:
    • In the year of renunciation, you must file a final “dual-status” tax return using Form 8854. This return apportions your income as a U.S. citizen versus a non-resident alien based on the renunciation date.
  4. Post-Renunciation Taxation:
    • After renunciation, you are only taxed on U.S.-source income. This includes income from any U.S. businesses, investments, rental properties, etc.
  5. Outstanding Tax Liabilities and Penalties:
    • Outstanding tax liabilities and penalties from before renunciation remain due after renouncing. The IRS can still audit, assess taxes and penalties, and pursue collection.
  6. Impact on Social Security and Citizenship for Children:
    • You lose the ability to pass on U.S. citizenship to children born after renunciation. However, existing Social Security benefits are retained.

Summary

The major tax implications when renouncing U.S. citizenship include:

  • Ensuring full tax compliance for the previous five years to avoid triggering the exit tax.
  • Potentially paying the exit tax Only if you are a covered expatriate, based on your net worth, average annual net income tax liability, or failure to certify tax compliance.
  • Filing a final dual-status tax return (Form 8854) in the year of renunciation.
  • Being taxed only on U.S.-source income after renunciation.
  • Continuing responsibility for any outstanding tax liabilities and penalties.
  • Retaining existing Social Security benefits but losing the ability to pass on U.S. citizenship to future children.

By understanding these implications, you can better prepare for the financial and legal responsibilities associated with renouncing U.S. citizenship.

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3. How much does it cost to Renounce U.S. Citizenship?

Renouncing U.S. citizenship involves a non-refundable government fee of $2,350, charged by the U.S. Department of State for processing the renunciation. There is a proposal to lower this fee to $450, but it has not yet been implemented.

In addition to the renunciation fee, you must ensure you are tax compliant for the five years preceding your renunciation. This includes filing all required U.S. tax returns and reports (such as FBARs) and paying any outstanding tax debts. The costs for tax compliance can vary, including fees for tax preparation, potential back taxes, interest, and penalties.

Streamline the Process with Our Renunciation Package

To make the renunciation process easier and ensure full compliance, consider our Renunciation Package. Our comprehensive package includes assistance with tax compliance, preparation and filing of all necessary forms, and expert guidance throughout the renunciation process. Let us help you navigate this complex journey smoothly and efficiently. Contact us today.

Related: Affordable renunciation: Power of Recovery Rebate Credit 

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4. What is the difference between relinquishing and renouncing U.S. citizenship?

The difference between a “surrendered”, “relinquished”, and “renounced” U.S. citizenship:

Surrendered is not a term that is defined in the Internal Revenue Code (IRC) or the Immigration and Nationality Act (INA). It is casually used to describe people who gave up their U.S. citizenship, regardless of the method used.

Relinquished. These are people who perform an “expatriating act” with the intention of relinquishing U.S. citizenship. Common expatriating acts include acquiring another country’s citizenship, being a state worker for another country and joining the army of another country. They are listed in Section 349 of the INA.

No formal notification needs to take place for the U.S. citizenship to be lost (for immigration purposes).

That is not true, however, for tax purposes. If the expatriating act occurred after 2004, people will continue to be taxed as a U.S. citizen until they notify the Department of State and then file form 8854 with the IRS.

Practically speaking, this notification takes the form of going to a U.S. consulate, convincing them that the expatriating act occurred and then applying for a Certificate of Loss of Nationality.

Renounced. This procedure takes place when a U.S. citizen makes an appointment at a U.S. consulate and applies for a Certificate of Loss of Nationality.

Unlike the relinquishment, the loss of citizenship occurs there and then when the U.S. citizen tells the consulate employee, “I’m out of here.” In addition, the U.S. citizen doesn’t need to convince the consulate officer that an expatriating act has occurred, as the expatriating act occurs during the appointment at the consulate.

As for a relinquishment, one would need to file Form 8854 in order to no longer be a U.S. taxpayer. The relinquishment allows you to stop being a U.S. citizen at an earlier date.

This could be advantageous in a few scenarios:

– If the expatriating act occurred before 2004, then no further action is needed for tax purposes.

– If the taxpayer has children born after the expatriating act and wants to keep the children out of the U.S. tax system. If the parent was not a U.S. citizen.

Either way, you will want to document your separation with the United States with a Certificate of Loss of Nationality, file form 8854, and certify that you were tax compliant for the prior five years and want a “clean break”.

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5. What is an Expatriating Act?

An expatriating act refers to specific actions that can potentially cause a person to lose their U.S. citizenship as defined by the Immigration and Nationality Act (INA) and the Internal Revenue Code (IRC). According to U.S. law, the main expatriating acts include:

  1. Obtaining Naturalization in a Foreign Country:

    • INA Section 349(a)(1): If you obtain naturalization in a foreign country after the age of 18, it is considered an expatriating act.

  2. Taking an Oath of Allegiance to a Foreign State:

    • INA Section 349(a)(2): Making a formal declaration of allegiance to a foreign state after the age of 18, such as taking an oath or making an affirmation, can be an expatriating act.

  3. Serving in the Armed Forces of a Foreign State:

    • INA Section 349(a)(3): Enlisting in the armed forces of a foreign state that is engaged in hostilities against the U.S. is considered an expatriating act.

  4. Accepting Employment with a Foreign Government:

    • INA Section 349(a)(4): Accepting employment with a foreign government after the age of 18, if you have the nationality of that foreign state or if you take an oath of allegiance to that state, can cause loss of U.S. citizenship.

  5. Formally Renouncing U.S. Citizenship:

    • INA Section 349(a)(5): Renouncing U.S. citizenship in person before a U.S. consular or diplomatic officer outside the United States is a clear expatriating act.

Intent and Voluntariness

For an act to qualify as an expatriating act that can cause the loss of U.S. citizenship, it must be performed voluntarily and with the intention of relinquishing U.S. citizenship. The key points are:

  • Voluntary Action: The act must be done voluntarily. Forced or involuntary actions do not count as expatriating acts.

  • Intent to Relinquish Citizenship: The person must have the specific intent or “conscious purpose” to give up their U.S. citizenship rights and privileges through that act. Simply performing an expatriating act is not enough; there must be a proven intent to relinquish citizenship.

Determining Intent

Determining intent is crucial because there is no legal presumption that someone intended to lose citizenship just by performing an expatriating act. The totality of the circumstances, including statements made by the person, must demonstrate it was more likely than not that they intended to relinquish citizenship.

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6. Will I Lose My Social Security Benefits If I Renounce My U.S. Citizenship?

If you renounce your U.S. citizenship, you will generally not lose your Social Security benefits. If you have paid into Social Security for at least 40 quarters (10 years), you remain eligible to collect Social Security retirement benefits even after renouncing citizenship. Your Social Security number remains valid, and you can continue receiving payments without having to file U.S. tax returns on that income.

However, Social Security payments cannot be sent to certain countries like Cuba, North Korea, and several former Soviet republics. Additionally, the renunciation process must be properly handled and not done for tax avoidance purposes, which could jeopardize your benefits.

As long as you qualified for Social Security while a U.S. citizen and your renunciation is properly processed, you can generally continue receiving your Social Security retirement payments after renouncing your U.S. citizenship.

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6. Who is a Covered Expatriate?

You are considered a covered expatriate and must pay the related Exit Tax if you meet any of the following criteria:

  • Net Worth: You have a net worth of $2 million or more.

  • Income: Your average annual net U.S. income tax liability exceeds $190,000 for the five-year period prior to expatriation.

  • Tax Compliance: You fail to certify that you have complied with all U.S. federal tax obligations for the preceding five years.

Even after obtaining a Certificate of Loss of Nationality, former U.S. citizens may still have tax obligations. For more information regarding these obligations, it is advisable to contact the Internal Revenue Service.

Exceptions to Covered Expatriate Status

There are two main exceptions to the covered expatriate rules:

  1. Dual Citizens at Birth:

    • If you were born with dual citizenship and remain a resident and subject to tax in your country of second residence and citizenship.

  2. Minors:

    • If you relinquished your U.S. citizenship before the age of 18.5 and have not lived in the U.S. for more than 10 years.

Non-Covered Expatriate Conditions

You are not a covered expatriate if both of the following conditions are met:

  • Your relinquishment of U.S. citizenship occurred before the age of 18.5.

  • You have been a resident of the U.S. for no more than 10 taxable years before the date of relinquishment.

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7. What do I need to know about my final tax return?

You will have to file your final tax return and attach Form 8854. Your final return will cover both periods when you were a resident and the period during which you were a non-resident. If your renunciation date is any day other than December 31st, you’ll be filing Form 1040 and 1040NR (if applicable) for your final return: IRS Form 8854, the Expatriation Information Statement, is the Exit Tax form and it’s filed along with your final return. It’s not especially difficult, but you will want to make sure you do it right.

Form 8854 is targeted at “covered expatriates”.

 Covered expatriates are those who meet the following criteria:

             – Have too many assets: a net worth of $2 million or more

             – Have too much income: an average net U.S. income tax liability of greater than $162,000 for the five-year period prior to expatriation

              – Have failed to certify that he/she has complied with all U.S. federal tax obligations for the preceding five years.

You write “Dual-Status Return” at the top of Form 1040NR and “Dual-Status Statement” at the top of Form 1040, which you then attach to Form 1040NR. The first one covers the period when you were a non-resident and only applies to U.S. sourced income, which might be zero. Form 1040 covers the period when you were a U.S. citizen and reports all worldwide income. You need to file all of the appropriate schedules and forms, including Form 8854.

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8. What is Exit Tax?

The Exit Tax is the IRS’s last chance to tax you before you give up your U.S. citizenship or long-term residency. It is akin to an estate tax on the unrealized gain in your assets, even though you are not actually selling anything. The tax is calculated as if you had sold all your assets on the day before you expatriated and had to report a capital gain. Currently, the rate on net capital gains is 23.8%, including the net investment income tax.

Who is Subject to the Exit Tax?

Three factors determine whether you are a “Covered Expatriate” and thus subject to the Exit Tax:

  1. Net Worth:

    • If the aggregate net value of your worldwide assets exceeds $2 million on the renunciation date. If you are married, each spouse’s net worth is calculated separately. Couples can gift assets to each other to lower their individual net worth below $2 million. If the receiving spouse is a U.S. citizen, these gifts may escape the gift tax. For 2023, there is an annual exclusion of $175,000 for gifts to non-citizen spouses. Consult a professional tax advisor for specific advice.

  2. Average Annual Net Income Tax Liability:

    • If your average annual net income tax liability for the past five years exceeds $190,000 (for 2023, adjusted for inflation). This applies even if you are married and filing taxes jointly. You might need to file separately for several years before expatriating to lower your average tax liability.

  3. Tax Compliance:

    • If you have failed to certify five years of U.S. tax compliance. You can amend your previous tax returns and file Form 8854 last to certify compliance after correcting any issues.

If you are not a covered expatriate, you are not subject to exit tax.

How is the Exit Tax Calculated?

The Exit Tax treats you as having sold all your worldwide assets on the day before expatriation. You are taxed on any unrealized gains exceeding $821,000 (for 2023). The tax is assessed at the capital gains rate of 23.8%.

Implications of Being a Covered Expatriate

  • Gifting to U.S. Persons:

    • If you are a covered expatriate, gifts or bequests to U.S. persons are subject to a tax. Even if your Exit Tax liability is minimal or you owe none (due to the $821,000 exclusion), it is often advisable to avoid being classified as a covered expatriate.

  • Tax Compliance and Clean Break:

    • Achieving a clean break from the U.S. tax system should be your goal. Ensure full tax compliance for the preceding five years to avoid the covered expatriate status and its consequences.

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9. Will renouncing my U.S. citizenship automatically cancel my tax obligations?

Renouncing your U.S. citizenship will not automatically cancel your tax obligations. Prior obligations remain, so you would only be a non-resident on an ongoing basis. You must notify the IRS of the change in your status by filing Form 8854 and then filing a copy with the Department of Treasury as well. You will be treated as a U.S. citizen for tax purposes until you file this form. The same rules apply to green card holders. You must file the form as soon as possible after you renounce your citizenship.

U.S. citizens and green card holders are obligated to report their worldwide income, even if they live outside the U.S. The act of expatriation does not terminate your obligation to file a U.S. tax return and report all your worldwide income. You need to be tax compliant for the past five years and file form 8854. Failure to do so means you will be considered as a covered expatriated (subject to an “Exit Tax”, which is a tax on the deemed disposition of all assets, tax on gifts to U.S. persons and others) and it could lead to an audit.

Form 8854 asks for general information regarding your new country of tax residence, date of expatriation, your U.S. tax liability in the last five years and your net worth on the date of your expatriation. It is used to acknowledge the change of your tax status and determine your status of expatriate or covered expatriate. 

A covered expatriate is subject to an “Exit Tax” 

Exit Tax is calculated, based on your net worth, as if you had sold all your assets on the day of expatriation, and is subject to capital gains tax rates. 

Being a “covered expatriate” has many negative consequences and so you should avoid being one if you can. The goal of many expatriates is to have a final, clean break from the U.S. tax system.

If you want to give up your U.S. citizenship, don’t hesitate to contact us for a consultation or to help with your final tax returns and sort out your U.S. taxes. It is a decision that should not be taken lightly as there are many consequences of expatriation. We work with a Toronto based lawyer John Richardson and help with even most complicated situations.

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10. Renouncing U.S. Citizenship – Implications Abroad

If you’ve been living abroad for quite some time now, it may start to almost “feel” like you’re a citizen of the country in which you’re living. That’s only natural, but that doesn’t provide you any legal status. Instead, you may want to consider renouncing your American citizenship for different reasons.  While there may be benefits of renouncing your U.S. citizenship vis-a-vis your tax obligations, there are certain implications to consider before pulling the plug on your U.S. citizenship. 

Benefits of Renouncing US Citizenship

We’ve already mentioned one of the biggest benefits of renouncing US citizenship: tax liability. If you’re not working in the United States and you’re not a citizen, you may not have to pay income tax anymore depending on your specific situation

That said, another of the benefits of renouncing US citizenship is that you don’t have to completely divest yourself of all your American holdings if you have financial interests stateside. For instance, you can keep your investments, rental properties or anything else even if you renounce. Yes, you’ll have to deal with taxes on those holdings, but this could be helpful. 

For every American who’s been living abroad for some time, there are pros and cons of renouncing US citizenship. If you’d like to learn more about the potential benefits of renouncing US citizenship for you along with the risks, please feel free to contact us at any time. We’ll be happy to take a look at your situation from a tax perspective and help you move forward. 

 

11. Relief Procedure for Accidental Americans

Accidental Americans are people who, even though they are U.S. citizens, never lived in the U.S., and yet just as any other U.S. citizen, they are required to file U.S. tax returns.

The IRS created a program to partially close that injustice. This is called the “Relief Procedure for Certain Former Citizens”. The key benefits include:
      – Ability to get into compliance, and avoid covered expatriate status, by filing the tax returns after having already renounced
      – Possibility to file the tax returns without a Social Security Number
      – If less than $25,000 is owing, it doesn’t require payment

A key limitation of this program is that it is only available to those who never filed a US tax return.

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