Exit Taxes When Renouncing US Citizenship for Expats

Renouncing one’s citizenship is perhaps one of the most personal decisions that will be made in their life. Since the introduction of FATCA back in 2010, US citizens are renouncing their citizenship like never before. While the Foreign Account Tax Compliance Act may not be the only reason for Americans across the globe to give up their US passport, it may be an ample reason why many American expats begin to consider giving them up. It will cost you, though. Fees and exit taxes when renouncing US Citizenship can add up!

Did you know that up to half of American expats we polled have considered renouncing their US citizenship? Is a topic on a lot of our expat minds. But how does one go about this lengthy process? What effect does this have on the individual’s tax obligations? Today we will explore parts of the renouncement process and dive deeper into exit taxes that Americans are likely to face throughout their renouncement. 

Is Renouncing my Citizenship the Right Decision for me?

While this decision can only be made after meticulous consideration, it may be the right one for you. If you decide to go ahead with the process, it is essential to know that your US passport will be immediately revoked and marked invalid.

Once fully renounced, you are no longer a US citizen. It’s an irreversible decision UNLESS you renounce before age 18 AND apply for US citizenship within six months of turning 18. However, this is implausible as renouncing before the legal age is complicated and often: denied. 

Another thing to consider is your children. If you renounce before transmitting US citizenship to your children, they will not receive American citizenship at birth. However, if you have children already who have American passports and renounce your adult US citizenship, your children will not automatically lose their American status.

How to Pay the Exit Taxes & Renounce Your American Citizenship

Before you know if you’ll have to pay Exit Taxes when renouncing your US citizenship, you first need to know what it takes to renounce.

To entirely renounce your US citizenship, you must first have a second passport. It’s your proof of citizenship in a foreign country. You need to bring it to your renunciation appointment. The State Department will deny the renunciation request of anyone without a second passport.

Before your appointment at your local US embassy or consulate abroad, you’re going to need the right form. You’ll need Form DS-4079, Request for Determination of Possible Loss of United States Nationality. As well as original documents of your birth certificate or consular report of birth abroad or other forms of proof of your US nationality and identity. Further documents that are required are stated on form DS-4079. 

At your appointment, you will appear in front of a US consular or diplomatic officer, sign an oath of renunciation, and pay the one-time fee of $2,350 as of 2022.

Do I Need to be Caught Up on my US Taxes? 

This is a big yes! To renounce your US citizenship, you must be entirely caught up on your US taxes. This rule applies to both expats and otherwise. If you suddenly realize that you may be behind on your US expat taxes, The Streamlined Filing Compliance Procedure may be the simplest way to get caught up and avoid penalties. 

With the Streamlined Procedure, you can file tax returns from the previous three years, and your Final Tax Return will be filed for the year of renunciation as a ‘dual return.’ You will also file six years of past FBARs when you use the Streamlined Procedure.

If you have not complied with your US tax obligations for the last five years, you will be required to pay the exit tax.

What is a Covered Expat?

When researching renouncing information, you will often come across this term: “covered expat.” But what does it mean? 

A covered expat is someone the IRS considers covered under the US tax code. They are either a US citizen or long-term resident. Covered Expats are subject to paying an exit tax when surrendering their US citizenship. However, some covered expats may not be subject to the exit tax. Let’s talk about it! 

You are a covered expat if you meet one of these three qualifications: 

1. You have a net worth of more than 2 million USD
2. Your average annual net income tax liability for the last five tax years ending before the date of expatriation is more than $171,000 for 2020, $168,000 for 2019, $165,000 for 2018, and so on. 
3. You are unable to prove tax compliance for the past five years on form 8854

If you do not meet any of the above qualifications, you are not liable to pay the exit tax; however, you will still need to file form 8854 in your final US tax return.

An exception to the covered expatriate rule: dual citizens of the US who were in the US for less than ten years during the 15-tax-year period ending with the tax year during which the expatriation occurred and/or continue to be citizens and pay tax in their dual-country. 

How Much is the Exit Tax when Renouncing US Citizenship? 

Now to get to the meat and potatoes. How much does the exit tax cost for those required to pay it? You will be required to pay the exit tax in two main ways. The first is if you have a net worth of two million dollars. Add all of your assets, including your home, to reach that figure. The second way you can be required to pay exit taxes is if you have not complied with your US tax obligations in the last five years. 

At the time of writing, the current maximum capital gains rate is 23.8%. Broken down, it’s 20% capital gains tax and 3.8% net investment income tax. 

While it may seem that the ‘exit tax’ is level of Brute, they are relevant because some of the taxable incomes, including capital gains on home ownership, are not taxed until the asset is disposed of. As the United States cannot pursue you for taxes once you entirely leave the US jurisdiction, it is a simple way to ensure all dues and taxes are up to date. 

More to Consider

Choosing to renounce one’s citizenship should never be taken lightly. Generally, MyExpatTaxes doesn’t recommend it. But we know there is a lot to consider. That’s why Nathalie Goldstein, CEO of MyExpatTaxes, has also covered the topic in a piece for Forbes.

Expatriation and ‘exit taxes’ are complex, we understand! If you consider renouncing your citizenship but need to catch up on your previous US expat taxes, MyExpatTaxes can help. Our tax experts are ready via our live chat, help center or by booking an appointment with us. 

Let us help you fill out your US taxes one last time. Perhaps you will even see how easy it is to file and realize FATCA and tax filings aren’t as painful as renouncing! 

Get started for free, pick a plan when you’re ready. Or see the Pricing Page for all the details.