What Giving Up U.S. Citizenship Really Costs

What Giving Up U.S. Citizenship Really Costs

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The U.S. allows its citizens to have more than one passport, but often there isn’t any tax advantage to doing so, tax experts say.

“No matter how many citizenships they hold, Americans still owe U.S. taxes on their world-wide income,” says Philip Hodgen, an international tax lawyer who practices in Pasadena, Calif.

There is a more extreme, and permanent, maneuver: renouncing U.S. citizenship outright. People considering that should be aware that the process can be long, complex and costly, tax experts say. Here are some issues to be aware of.


Renouncers must certify that they have been tax-compliant for the last five years—and sometimes produce the returns to prove it. For this reason, renouncing citizenship isn’t a ready solution for coping with past tax errors, tax experts say.

Exit Tax

Some would-be expatriates owe a hefty exit tax. The law treats many renouncers as having sold all their world-wide assets on the day before the renunciation, even if the person will continue to own the property and pay tax on it.

The exit tax applies to renouncers whose net assets are greater than $2 million or whose average annual income tax has been greater than about $160,000 for the last five years. Net capital gains are taxable at rates up to 23.8%. Special rules apply for pensions, trusts and accounts such as individual retirement accounts, but they are taxable.

There are some exceptions to this tax, such as for people who have been dual citizens from birth. (For more information, see the instructions to IRS Form 8854.)

Exit Interviews

Expatriation usually requires one or more exit interviews with consular officials, although often the conversations are brief unless there are irregularities. The law also requires the names of U.S. citizens who give up their passports to appear on a list published quarterly by the Treasury Department, which some people might consider embarrassing.

Inheritance Tax

Heirs could owe big tax bills. The U.S. heirs of wealthy taxpayers who renounce their citizenship often owe a stiff inheritance tax on bequests from them. (This provision doesn’t apply to spouses of expatriates who are U.S. citizens.)

For example, say a woman worth $6 million renounces her citizenship and becomes a citizen of St. Kitts and Nevis. If she leaves each of her three American children $2 million, each will owe about $800,000 of federal tax on the bequest, Mr. Hodgen says.

Travel Hurdles

Travel abroad might become complicated, with more visas required—even to the U.S. If an expatriate wants to return to the U.S., it might be difficult for him or her to spend more than 120 days a year (on average) here without becoming a taxpayer. And the expatriate must not appear to be using a visitor’s status to live in the U.S.

Entry Denied

Under a provision known as the “Reed Amendment,” U.S. officials can deny entry to any person who has renounced citizenship for tax reasons. This provision is rarely if ever applied, but it remains on the books.

Source : Laura Saunders  The Wall Street Journal