Tax Concerns when Renouncing Citizenship for US Expats
The record-breaking 4279 renunciations in 2015 is a sign of a trend among many expats at present. One of the reasons might be the lack of interests the government is giving for US expats concerns. Whatever reason you may have to surrender your citizenship, there are things to consider, especially those related to your tax returns.
Procedure on Renouncing US Citizenship
There are five easy steps if ever you have decided to spend the rest of your days abroad and break your connections with the United States.
Secure a second passport from another country.
Although US citizens are not restricted to leave the country, as a US expat, you have to secure and present your second passport as the first step of your citizenship renunciation. Passports acquired online is usually not acceptable, so better present one that you received from the country where you plan to move.
Prepare the forms
The US government requires the accomplishment of five forms to process your renunciation. These forms are DS-4079 to DS 4083. Complete DS-4079 before your appointment
Book an Appointment
Different embassies in different countries might have several procedures on the booking of renunciation appointments. Make sure you inquire with your local consulate for the details and book accordingly. A lawyer can also appear before the US offices on your behalf. It is still easier if you could appear personally. If with a lawyer, prepare form G-28 as proof of your representative.
Appear on Your Appointment and Sign Documents
Once your office appointment is set, prepare the necessary documents to bring. Then be ready to provide these on the appointment day. Afterwards, you will receive the form DS-4083 or the Certificate of Loss of Nationality. Keep this form as the physical evidence of the day you have signed for renunciation.
File US Tax Return
This will be your final tax return as a US citizen. The tax return will cover the beginning of the year up to the day you expatriate. But the value of all your assets will be computed as the day before. Read further to understand the implications your renunciation has on your taxes.
Many experts believe that US expat tax compliance regulations and penalties are reasons many US citizens decide to leave the country. There are however tax costs associated with your renunciation.
The Exit Tax
For wealthy expats, this tax applies under three conditions:
- If your annual net income exceeds $160,000 within five years ending on the date before your renunciation
- If your net worth is $2 million or more on your expatriation date
- If you failed to certify IRS regarding US tax obligations for five years before the date of your renunciation.
If any of these criteria fits your status, then you are a “covered expatriate”, and you are required to pay the exit tax. This tax covers the net market value of your property on the day before you signed the renunciation.
For those US taxpayers who do not fall under the above criteria, you may be asked to pay back taxes and the corresponding interests. Individuals who failed to file US tax returns or have errors in previous filings will need to pay this tax bill.
The penalty amount varies. For instance, if you fail to file your FBAR (Foreign Bank and Financial Accounts Report) or Form 8938, the penalty can be up to $10,000 per form per year. One solution for this is to enter into a tax amnesty program with the IRS.
Having a 401k earning will need you to research your foreign country’s treaty policy with the US. You have to determine if you will be paying taxes in the United States or in your new local country.
Aside from these effects on taxes, be aware that your break up with the US entitles a cost. The US Department requires a fee of $2350 for US expat finalizing their connections with the country.
You also cannot request to regain your US citizenship once it is renounced. Even traveling to the country will not be easy as there are other conditions necessary before you will be allowed.