Thinking about renouncing your US citizenship? Beware of the exit tax.

Are you planning to renounce your US citizenship? Then, you must be aware of some facts when deciding to renounce US citizenship. In this article, let us discuss in more detail the various facts related to tax implications and renouncing your US citizenship. So, stay tuned at USTAXFiling to get all the updates!

If you wish to renounce your citizenship in the US, you must be aware that this is a sudden decision, and you should take it seriously. Once you take this leap, you should not change your mind at all. To assist you in making an informed decision, here are a few vital facts to know when you plan to renounce your citizenship in the United States.

Major Facts About Renouncing your US citizenship

  • The State Department does charge a flat fee for renouncing your US citizenship. For now, it is $2350. Based on your income tax status, you might have to pay additional income taxes when renouncing US citizenship
  • The tax implications of renouncing US citizenship are a time-consuming and complex process.

How to Renounce Your US Citizenship 

There is no doubt the tax implications of renouncing your US citizenship is a challenging and tedious process. To complete the process, you have to:

  • File a final income tax return.
  • Get a renunciation appointment.
  • Fill out many forms.
  • Get a non-US passport.

Based on your financial information, you might have to pay the US exit tax. We will discuss it, but first, let us take a closer look at the following steps to renounce your US citizenship.

Get a non-US passport.

You cannot renounce your US citizenship without a passport that is issued by a foreign country. The State Department will reject your request for renunciation without a foreign passport. It means that you are not rendered stateless, which might make it virtually impossible for you to:

  • Work
  • Buy property
  • Rent
  • Get a new passport
  • Travel
  • Get medical services

As you may see, not having a new country to call your home will make your life tough.

Prepare the required forms.

Once you have a foreign national passport, the next step is to fill out the forms with complete details for your renunciation appointment. The main forms include:

  • DS-4079: This form is a request for the determination of possible loss of US nationality
  • DS-4080: This form is the Oath of Renunciation of the Nationality of the US
  • DS-4081: This form is a Statement of Understanding, that means the Ramifications of Relinquishment and Consequences or even renunciation of your US citizenship
  • DS-4082: This form is Relinquishment of Citizenship or even Witnesses Attestation Renunciation
  • DS-4083: This form is a Certificate of Nationality Loss of the US

You must fill out the above-mentioned form before your renunciation appointment, but you should not sign it. The official who conducts the interview should witness you signing each form.

Schedule a Renunciation Appointment

The next step is to schedule your renunciation appointment. The appointment should take place at a consulate in a foreign country or US embassy, and you should attend in person. Several expats must prefer a consulate or embassy in the country they plan to reside in, but you must schedule your appointment in any country you have legally entered. 

You must bring all of the forms you already filled out to your appointment. Also, you may have many other documents like a US birth certificate or foreign passport (if applicable). When you schedule your appointment, you must ensure to double-check the documents that you may need.

You Should Attend Your Renunciation Appointment 

When you reach for your renunciation appointment, an official may check your documents. They may also interview you to make sure that you are acting voluntarily and know the reasons why you are renouncing your US citizenship. 

If everything goes as planned, you may pay the renunciation charges and sign the different documents that you have prepared. You may also sign an oath of renunciation that finalizes your decision to renounce your citizenship in the US.

File Your Final Income Tax Return

After you sign your oath of renunciation, you are considered a US individual for income tax purposes until you file your final income tax return using the IRS 8854 form.

How Much Does It Cost to Renounce US Citizenship? 

Currently, the State Department takes a charge for renouncing your US citizenship, that is $2350. Based on your income tax status, you might also have to pay for your additional income taxes when you renounce your citizenship.

Tax Implications of Renouncing US Citizenship 

Once you renounce US citizenship, you might no longer be subject to taxation in the US. Also, you might have to solve any of your outstanding income tax debt first, and you might also have to pay your exit tax. Let us look at the tax implications of renouncing your US citizenship.

Outstanding Income Tax Debts 

To renounce your US citizenship, you should be tax-compliant for a minimum of five years. It means that you should have one of the following:

  • You must pay your tax debts if you have any
  • You must file an income tax return each year for the last five years

If you have not filed your US income tax return, as you are not at all aware that it was needed for Americans residing overseas, don’t worry at all. The Internal Revenue Service provides an amnesty program named Streamlined Filing Compliance Process that might aid some expats in coming into tax compliance based on meeting the following needs:

  • You must file your three delinquent income tax returns and pay taxes that you have with interest
  • You should self-certify that you failed to file due to ignorance rather than willful refusal
  • You must file a report of FBAR (Foreign Bank and Financial Account) for each of the previous six years.

It may bring you into compliance with the Internal Revenue Service as a citizen of the United States. Also, in order to renounce your US citizenship, you should show that you have filed your income tax returns for the previous five years. It means that you may have to file additional income tax returns if you don’t meet that standard after filing the three needed by the Streamlined Filing Compliance Procedures.

Exit Tax 

The exit tax is a tax that specific expats have to pay when they renounce their US citizenship. This tax is not a charge. It is a final bill for assets that are not taxed yet, such as capital gains from funds or homeownership in a retirement account.

When you calculate your exit tax, it might be tough. For several assets, the tax is calculated by treating assets as if you might have sold them at fair market value then taxing the unrealized capital gains. Also, not all of the assets get treatment, and the regulations might be confusing.

Consult an expat tax professional in the USA when calculating your exit tax liability. The charges for getting the math wrong might be harsh. The best part is that only expats deemed covered expatriates by the Internal Revenue Service are subject to the exit tax.

Expat Gift Tax 

Being a covered expat in the USA might lead to more tax issues than the exit tax. It might affect your capability to provide gifts to US citizens years after you renounce your US citizenship.

Under the US tax regulation, if a US individual gets a gift from a covered expat that exceeds the $15,000 yearly exclusion, the gift is taxed at 40-50 percent of the gift tax rate. The tax is imposed on the US individual who gets the gift rather than the covered expat who gave it.

For instance, let us say that John was a covered expat in the USA when he renounced his citizenship in the USA and shifted to Costa Rica. His daughter Suzi stays in the USA as a citizen. When Suzi gets married, John wishes to give her and her new partner a gift of $50,000.

As John is a covered expat in the USA, and due to his gift exceeding the year gift tax exclusion of $15000, Suzi may have to pay a 40 percent tax on her father’s gift to her.

Don’t Miss Out Potential Tax Problems After Expatriation

When you renounce your US citizenship, it does not always get you entirely out of the US tax system. If you have any income earned from the USA, you may have to continue to file the income tax, but you might have to file Form 1040-Non-resident (Non-resident) after the expatriation. Such income may include withdrawals from a 401 (k) or IRA account in the future. It may also include any income from rental property that is situated in the United States or for any business activities in the USA.  

You may have to pay a flat tax of 30 percent on dividends, rental income, interest, or even similar kinds of investment income. You have to plan your expatriation carefully so that you don’t have to pay more in tax than if you had not renounced.

The Difference Between Non-covered and Covered Expatriates

Knowing whether you become eligible as a covered expat in the USA is necessary in deciding whether you renounce your US citizenship make sense. So, what is the difference between a non-covered and a covered expat in the USA?

In a simple manner, the Internal Revenue Service may consider you a covered expatriate if any of the following may apply:

  • You may fail to indicate on the 8854 form that you have filed your income tax returns for the previous five years
  • Your personal net worth exceeds $2 million
  • An average income liability over the previous five years exceeds a set threshold of $178,000 for the financial year

If you meet any of these standards, you may be subject to the IRC 2801 exit gift tax and the exit tax. 

Green Card Holders Beware 

If you have stayed in the United States for a decade or more, then giving up on your Green Card is determined as expatriation, and you might become liable for the Exit tax. If you have stayed in the USA for 8 of the last 15 years, you are considered expatriated if you give up on your Green Card. The word in is really vital, as living one day in any year is the complete year for this reason.

You must be careful when you are making tax treaty elections. When you make an election before meeting the eight years in the last 15 years law, it means that you stop the clock. It means that you make a tax treaty election does not count as a year in the United States. Also, if you have met the 8 in 15 years regulation, then making a treaty election is an expatriation act that might result in paying an exit tax whether you plan to renounce your US citizenship or not. You must be careful with the treaty elections you make as a Green Card holder.

Can You Get Your US Citizenship Back After Renunciation?

No, once you have renounced your US citizenship, it is not at all possible to regain it. The only exception is if you renounce your US citizenship before 18 years. In this scenario, you may regain your citizenship, but only if you connect with the State Department within six months of your 18th birthday.

Do You Have Any Questions Related to Renouncing Your US Citizenship? Get Assistance with Your Expat Taxes

Do you have any questions about the process of renouncing your US citizenship? You may connect with us at USTAXFiling, and one of our USTAXFiling experts will help you to resolve your queries. We at USTAXFiling are among the top online tax consultants in the USA who help you with meeting your US tax obligations, regardless of whether you renounce US citizenship. Our income tax filing experts are highly skilled and have years of rich years of experience. Our experts at USTAXFiling have all the latest updates related to US income tax filing. So, what are you waiting for? Call us right away at USTAXFiling now!

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