Feigenbaum Law

Renouncing US Citizenship As a Tax-Avoidance Strategy: Is it Worth It?

Personal Tax Planning
December 27, 2019

In last week’s blog, we discussed the case of an American business owner facing stiff penalties from the IRS for failing to report income held in Canadian accounts. The obligation to file taxes in the United States on income earned in foreign jurisdictions should not be news to Americans or dual citizens since the implementation of the Foreign Account Tax Compliance Act (FACTA), but the reality of satisfying this obligation may involve more work and expense than some people are willing to take on.

For individuals with American citizenship living outside of the US who want to avoid reporting income and paying tax in the United States, there are really only two options. The first is to simply ignore the obligation, while the second is to renounce one’s American citizenship. Of course, we know that ignoring tax obligations is never a wise move and will ultimately result in penalties. However, in recent years, a record number of people with US citizenship living abroad have made the decision to renounce their citizenship, largely due to the onerous tax obligations under FACTA.

Abandoning Citizenship

Abandoning one’s American citizenship is a serious decision. US citizens retain the right to travel freely to and from the United States as well as work there, vote in elections, seek protection from its government, and obtain citizenship for their children born in other jurisdictions. For these reasons alone, it’s wise to seriously consider whether renunciation is the appropriate step to take.

It’s also not easy to renounce American citizenship, in terms of time, money, and difficulty. The cost alone is over $2,000, and that doesn’t include any extra money payable if any exit taxes are owed.

Renouncing one’s citizenship is not a simple process. In order for renunciation to have legal effect, one must appear before a US consular or diplomatic officer at an American Embassy in a foreign jurisdiction and make a declaration. Further, they will be required to sign an oath of renunciation. Those who do not already possess citizenship in another jurisdiction need to exercise extreme caution, as renunciation would leave them stateless, without the protection of any government, and unable to secure a passport.

Exit Tax

US citizens wishing to renounce their citizenship will be subject to exit tax under sections 877 and 877A of the Internal Revenue Code if certain criteria are met. These criteria are:

  • The person has a net worth in excess of $2 million
  • The person has not complied with their US tax obligations for the last five years
  • The person has an average annual net income for the last five years of around $150,000-$160,000 (the amount varies for each of the last five years. Details can be found here).

What Counts as “All Assets”?

The first criteria listed in the preceding paragraph states that individuals with a net worth exceeding $2 million qualify for the exit tax. Of course, this doesn’t mean the person has to simply have $2 million in the bank. Qualifying assets include assets held outside of the United States such as homes and deferred income including pensions. The IRS requires people to use their actuarial tables to calculate deferred income, something that should only be done with the assistance of a tax professional.

An Important Decision With Long-Term Repercussions

One of the most important factors to consider when contemplating whether or not to renounce one’s US citizenship is the fact that the decision is permanent. The decision is irreversible unless the person making the decision is under 18, and they make their intention to change their mind known to the State Department within six months of turning 18.

Speak to an Experienced Tax and Legal Professional if Considering Renunciation

The law around the renunciation of one’s citizenship is complex and this decision requires thorough consideration. Renunciation is an irrevocable and life-changing decision that may make sense for those holding dual citizenship who know for certain that they do not plan on living in the US at any point and are facing onerous ongoing American tax obligations. However, tax issues and citizenship can be especially complicated, which is why it is critical to obtain the assistance of a professional tax lawyer for guidance with respect to this process.

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. We work 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.


Tagged: citizenship-based taxation, dual citizens, FACTA