Renouncing your US citizenship: A deep dive into tax implications for expats

Every year, thousands of Americans face a tough decision: renouncing their US citizenship.

Whether it’s due to financial burdens, compliance headaches, or lifestyle choices, this decision is never taken lightly.

Among the critical considerations is the Exit Tax, a levy on expatriates with substantial assets.

In this guide, we’ll break down the renunciation process, the tax implications, and the practical steps to take, so you can make an informed decision.

Why do people renounce US citizenship?

For many, renouncing US citizenship is driven by practical concerns rather than ideology. Key reasons include:

1. Tax compliance burden: The US is one of the few countries that taxes its citizens on their worldwide income, regardless of where they live. Compliance with complex regulations, like FATCA (Foreign Account Tax Compliance Act), can be onerous and costly.
2. Double taxation: Although treaties may mitigate some double taxation, many still find themselves subject to overlapping tax obligations.
3. High compliance costs: Hiring professionals to prepare tax returns and reports on foreign accounts can cost thousands annually.
4. Personal Freedom: Some individuals view renunciation as a way to simplify their financial and legal responsibilities.

What is the Exit Tax?

The Exit Tax is a levy imposed on US citizens and long-term residents who meet certain criteria when expatriating.

Who is subject to the exit tax?

You may be classified as a “covered expatriate” if:

• Your net worth exceeds $2 million, including all global assets such as property, investments, and retirement accounts.
• Your average annual tax liability for the past five years exceeds $201,000 (2024 threshold).
• You fail to certify tax compliance for the past five years by filing IRS Form 8854.

How is the exit tax calculated?

The Exit Tax is calculated based on a "mark-to-market" principle, which treats your assets as if sold at fair market value the day before expatriation.

1. Determine total gains: Calculate unrealized gains on all worldwide assets.
2. Deduct the exclusion: For 2024, the exclusion amount is $866,000.
3. Apply tax rates: Remaining gains are taxed based on ordinary income or capital gains rates.

Special asset rules

• Deferred Compensation: Pensions and retirement accounts have specific withholding rules.
• Trusts: Beneficial interests in trusts may trigger additional reporting and taxation.
• Tax-deferred accounts: IRAs and 401(k)s are taxed as if fully distributed.

Steps to renounce US citizenship

1. Prepare financially and legally

Preparation is the most critical step, as renouncing your citizenship can have significant financial and tax implications.

Calculate your net worth

Include all global assets, such as real estate, investments, retirement accounts, and even personal property.

If your net worth exceeds $2 million, you may be classified as a “covered expatriate” and subject to the Exit Tax.

Estimate potential exit tax

Use the IRS "mark-to-market" rule to assess unrealized gains on your assets. Work with a tax professional to ensure accuracy and identify strategies to minimize liabilities.

Ensure five years of tax compliance

Verify that you have filed all required US tax returns for the past five years, including any FBAR (Foreign Bank Account Report) filings for foreign accounts exceeding $10,000.

Plan for future financial needs

Consider how renunciation will impact access to US-based financial accounts, Social Security benefits, and retirement plans.

2. Secure another citizenship

Having citizenship in another country is essential to avoid becoming stateless, which can create significant legal and logistical challenges.

Research citizenship options

Some countries offer expedited paths to citizenship through investment programs, naturalization, or ancestral ties.

Obtain dual citizenship first

If possible, secure dual citizenship before renouncing, as this may offer more flexibility and security during the transition.

Understand your new tax obligations

Learn about the tax system in your new country of citizenship, including whether it has treaties with the US to prevent double taxation.

3. Initiate the Renunciation Process

This is the formal start of the renunciation process and involves reaching out to the appropriate US government representatives.

Contact a US embassy or consulate

Renunciation can only be completed in person at a US diplomatic office outside the United States.

Schedule your appointment well in advance, as wait times can vary by location.

Gather required documents

Prepare essential paperwork, including your valid US passport, birth certificate, and proof of citizenship in another country.

Complete necessary forms

Key forms include:

• DS-4079: Establishes whether your actions meet the criteria for renunciation.
• DS-4080 and DS-4081: Officially record your intent to renounce and take the Oath of Renunciation.
• Any other documents requested by the consulate.

4. Attend the appointment

The renunciation appointment is a crucial step where you formally give up your US citizenship.

Be prepared for questions

The consular officer may ask why you are renouncing, ensuring you fully understand the consequences. This step is to prevent impulsive or uninformed decisions.

Take the Oath of Renunciation

This legally severs your ties to the US as a citizen. The act is irrevocable, so ensure you are fully committed.

Pay the renunciation fee

The current fee for renouncing US citizenship is $2,350, which must be paid at the time of the appointment.

5. File final tax forms

Even after renunciation, you will have lingering tax responsibilities with the IRS.

File a dual-status return

For the year of expatriation, file a dual-status return that covers the period before and after renunciation:

• Before renunciation, report income as a US citizen.
• After renunciation, report only US-sourced income as a nonresident.

Submit Form 8854

This form certifies your tax compliance and finalizes your status as an expatriate. Ensure you report all required information about your assets and liabilities.

Monitor for future obligations

Even after filing Form 8854, some income sourced from the US (such as rental income or dividends) may still be subject to US withholding taxes.

Consequences of renunciation

Renouncing US citizenship results in the loss of rights and privileges, such as:

• Voting rights: You can no longer participate in US elections.
• Unrestricted travel: Travel to the US will require a visa or ESTA authorization.
• Access to US benefits: Loss of certain benefits, like Medicare, unless specific agreements apply.

Key considerations for families

• Inheritance tax: Leaving assets to US-connected heirs could result in higher estate tax rates.
• Future travel: Renouncing citizenship requires visas for future visits to the US.

Alternatives to renunciation

Before renouncing, consider these options:

1. Tax optimization strategies: Work with professionals to minimize tax burdens while retaining citizenship.
2. Dual citizenship: If allowed by your new country, this option lets you keep US citizenship while enjoying the benefits of another nationality.
3. Green card relinquishment: For long-term residents, surrendering a green card may simplify tax obligations without the need for full renunciation.

Practical examples

Scenario 1: High net worth individual

Jane owns $4 million in global assets and $1.5 million in unrealized gains.

After applying the $821,000 exclusion, she owes Exit Tax on $679,000 at the applicable capital gains rate.

Scenario 2: Compliant but not covered

John has an average annual tax liability below the $190,000 threshold.

He files Form 8854, certifies compliance, and avoids the Exit Tax.

Final thoughts

Renouncing US citizenship is a life-altering decision with long-term financial and legal consequences.

By understanding the Exit Tax, legal requirements, and post-renunciation responsibilities, you can approach the process with confidence.

At Taxes for Expats, our experts have decades of experience helping Americans navigate expatriation. Whether you’re ready to renounce or simply exploring options, we’re here to guide you every step of the way.