The Tax Implications of Renouncing U.S. Citizenship
November 6, 2020
As lawyers who work with clients on both sides of the Canadian/U.S. border, we can’t help but notice a particular trend that arises after each U.S. election, no matter the result. People threatening to leave the United States and move to Canada, perhaps even renouncing their American citizenship. For those lucky enough to hold dual citizenship, making such a move is easy. For Americans without Canadian citizenship, it can be a little more challenging. Regardless of which bucket you may find yourself in, there are important financial considerations to keep in mind before making such a move.
The Risks of Renouncing Citizenship
One of the biggest hurdles most Americans face is that renouncing their citizenship would leave them stateless. This isn’t a problem for people fortunate enough to hold dual citizenship in the United States and another country, such as Canada. However, even if a person holds dual citizenship, it’s important to understand the weight of making the decision to renounce American citizenship. When giving up American citizenship, one gives up the right to travel freely into and out of the United States. If travelling abroad, a person who has renounced citizenship would not be able to seek protection from the United States government. Additionally, obtaining U.S. citizenship for children born outside of the U.S. will no longer be an option.
However, if you’re still looking to move out of the United States for political, tax, or other reasons, it’s possible to do so after clearing some hurdles, including appearing before a U.S. consular or diplomatic officer at an American embassy.
It Costs Money to Renounce Citizenship
Those looking for an inexpensive path to renouncing citizenship may be disappointed to realize that an “expatriation tax” or exit tax, as it is also known, is imposed on those looking to do so. The exit tax is covered under sections 877 and 877A of the Internal Revenue Service Code. If a person has a net worth of over $2 million, has not complied with U.S. tax obligations for the last five years, or meets a minimum annual income (approximately $150,000), they will have to pay the tax.
Why Choose to Renounce U.S. Citizenship?
Now that we’ve covered some of the risks and costs associated with renouncing US citizenship, we should add that it is possible to do. A recent story published on CBC shared stories about people who said they would move to Canada after the last US election and actually followed through, though not all for the same reasons. Some chose to come to Canada for political reasons, some for work and others for financial considerations.
Of course, the situations described in the article do not cover those who moved away and also voluntarily renounced their U.S. citizenship. However, if any of the U.S. citizens in the CBC article decide to stay in Canada permanently, they may wish to do so to save money.
The primary reason to renounce citizenship isn’t to make a point, but rather to save money. The U.S. is a country that requires its citizens to file and pay income taxes every year, even on income earned elsewhere. This means that U.S. citizens often have to pay tax on the same income twice; once in the U.S., and once in their country of residence. While there are options for exemption from filing in the U.S., it can become costly and time-consuming to manage compliance. For this reason, the simplest and most effective method to escape these obligations is to renounce citizenship, if a person is confident they will be living abroad permanently.
The Importance of Speaking to an Expert
If you are considering renouncing your US citizenship because you want to avoid tax obligations or for another reason, it’s important to talk to an expert before going through with the complex process required. Tax issues are of particular importance. At Feigenbaum Law, we have a comprehensive and authoritative knowledge of US and Canadian tax law and help people, including dual or American citizens, navigate their tax obligations and responsibilities. Our team works with clients in both the United States and Canada. Please call us at (905) 695-1269 or reach us online to see how we can help you today.