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Renouncing U.S. Citizenship: Taxation And Other Implications

by | Jul 29, 2017 | Business, Firm News, Immigration, International Tax and Business Entities |

A record number of U.S. Citizens are renouncing their passports and cutting their official ties to the United States according to recent data released by the Treasury Department. With an all-time high and an increase of more than 20% from the previous year, over 4,200 American Citizens expatriated in 2015. This number is over eighteen times higher than the mere 231 individuals who expatriated in 2008.

Dual citizenship is not always possible, nor is it always the ideal situation for many individuals living abroad. More American citizens are choosing to forego their ties to the United States for a multitude of reasons, be it family, legal, or tax complications. Whatever the reason, expatriation is an important decision that carries with it several major consequences that an individual considering renouncing their citizenship should be aware of.

Before making the decision to renounce an individual’s U.S. citizenship, it is important to know what benefits are being forfeited when renouncing U.S. citizenship. There are many general benefits afforded to U.S. citizens regardless of where they are located, including:

1. Protection abroad. When traveling in politically unstable parts of the world, U.S. citizens are afforded the protection of the American government. Generally, for citizens who live in stabilized areas, this is not a determinative factor in considering whether or not to renounce citizenship.

2. The right to vote. With U.S. citizenship comes a constitutional right to participate in U.S. elections, which is terminated upon renouncing citizenship.

3. Consular services
. U.S. citizens traveling abroad are offered assistance in situations of detainment, passport issues, and other legal matters by the U.S. Consulate.4. Ability to travel. U.S. citizens are permitted to freely travel into and throughout the United States at their leisure. The same travel may be restricted by non-citizens in certain situations.

Equally important for a potential expat to consider are the benefits and consequences of renouncing their U.S. citizenship:

1. Taxation. If an individual decides to renounce U.S. citizenship, precautions need to be taken to avoid or minimize taxes owed to the government. Upon renouncing citizenship, an individual will need to pay taxes for the portion of the year from January 1 to the date the oath of renunciation was taken. Estate and Gift taxes may also be affected, as an individual who successfully renounces citizenship will not be subject to U.S. estate tax upon his death. U.S. situs property owned by a former-citizen, however, is still subject to this tax. Exit taxes may also apply to certain individuals who want to renounce their citizenship, and the costs of these taxes could have a significant financial impact on a U.S. citizen considering expatriation. For those covered expatriates, all assets will be treated as though they were sold, and the fair valuation of the estate will be treated as income or capital gains for the purposes of this exit tax. For this reason, it is important for an individual considering renouncing their U.S. citizenship to understand the extent of their assets and liabilities before renouncing their U.S. citizenship, and to consult with a legal professional prior to expatriation to understand and mitigate the financial impact of these taxes.

2. Travel. As stated above, traveling into or through the U.S. may become difficult, especially if an individual has committed a crime of moral turpitude in the past. These and other non-citizens may need to obtain permission before traveling into or through the U.S.

3. Statelessness. Persons who do not have a dual citizenship prior to renouncing may be rendered Stateless and lack the protection of any government, which could create problems with travel, employment, and housing. For this reason, renouncing U.S. citizenship without a second nationality should be avoided at all costs. Those without a nationality will be unable to acquire state-issued identification, which will preclude their ability to live a normal life: they will be unable to open a bank account, board a flight, operate a vehicle, or enroll in universities or other programs available to national citizens. Stateless individuals will not be able to function in a way that is safe and dignified within any nation. It is important to note that once U.S. citizenship is renounced, the process is irrevocable and any individual who changes his or her mind will need to re-apply for citizenship as though they never held a U.S. passport.

Due to the complexity of the expatriation process and the potential implications of renouncing U.S. citizenship, individuals who have decided to expatriate should find experienced counsel to help guide them through this process. UTF attorneys are available to guide individuals seeking to renounce their U.S. citizenship through the process of expatriation, taxation procedures, and may also be able to attend the exit interview conducted at the U.S Consulate General office. In the end, renouncing U.S. citizenship is a decision that must be weighed carefully and with much consideration, but is a decision being made by more individuals each year.