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You may find the US obligations that follow you around the world to be overly onerous and complex. Or you’ve been frustrated when you find the doors of financial institutions closed to you because they have no wish to become involved with the IRS. There has been a clear rise in expatriations over the last decade or so and tax reporting has certainly played a part in this.
Like many “Accidental Americans” you may have only learned of your obligations when looking to open a bank account and being informed of the US Foreign Account Tax Compliance Act (FATCA). The IRS has introduced a specific program for those in these circumstances who are wishing to get up to date and file their required returns, and then expatriate soon after to avoid any further obligations. Although perhaps not a direct correlation, the below shows a steep increase in expatriations not long after the introduction of this program, with the 2020 figures significantly higher than earlier years - and that’s during a global pandemic which closed many embassy offices and restricted access to the necessary services. However, we did see the numbers decrease back to pre-2020 levels in 2021, as pandemic restrictions continued globally.
If you were born and brought up in the US but left to work overseas, you may have now settled in a new country, but not sought to give up citizenship due to your US ties and the possibility of going back in future. If the time comes when you know you’ve found a new home and moved for good, then renouncing your citizenship will reduce your reporting requirements.
You may find the US obligations that follow you around the world to be overly onerous and complex. Or you’ve been frustrated when you find the doors of financial institutions closed to you because they have no wish to become involved with the IRS. There has been a clear rise in expatriations over the last decade or so and tax reporting has certainly played a part in this.
Like many “Accidental Americans” you may have only learned of your obligations when looking to open a bank account and being informed of the US Foreign Account Tax Compliance Act (FATCA). The IRS has introduced a specific program for those in these circumstances who are wishing to get up to date and file their required returns, and then expatriate soon after to avoid any further obligations. Although perhaps not a direct correlation, the below shows a steep increase in expatriations not long after the introduction of this program, with the 2020 figures significantly higher than earlier years - and that’s during a global pandemic which closed many embassy offices and restricted access to the necessary services. However, we did see the numbers decrease back to pre-2020 levels in 2021, as pandemic restrictions continued globally.
If you were born and brought up in the US but left to work overseas, you may have now settled in a new country, but not sought to give up citizenship due to your US ties and the possibility of going back in future. If the time comes when you know you’ve found a new home and moved for good, then renouncing your citizenship will reduce your reporting requirements.
One essential point before beginning the expatriation process is that you must have another citizenship - it’s not an option to become stateless. Therefore, you should seek advice before taking any action to ensure that renouncing your US citizenship is the best option for you.
If you’re a Green Card Holder, once you’ve held the card for eight years or more and then give it up or have it revoked, you’ll be treated as if you were expatriating and subject to the same rules as US citizens who relinquish their citizenship.
Consideration should then be given as to what kind of expatriate you will be; whether you would be a ‘covered expatriate’ or not.
You're a covered expatriate if you meet one of the following criteria:
1) Your average US net income tax for the preceding five years is more than a specified amount that is adjusted for inflation ($172,000 for 2021).
2) Your net worth is in excess of $2 million on the date of your expatriation.
3) You fail to certify that you’ve met your US Federal tax obligations for the preceding five years.
If you’re a covered expatriate, you are subject to a deemed disposal of all of your assets based on their market value the day before you expatriate. An inflation adjusted exclusion is then applied ($744,000 for 2021) and any resulting gain is subject to Federal tax at the relevant tax rate. This can cause significant problems if it results in a tax charge in the US but, without the actual sale of the asset, there is a shortfall of funds to pay the tax that is due. Furthermore, when the assets are sold in the future it’s possible that the country of residence will also seek to tax any gains at that time and without giving any relief for the US tax previously incurred. This can result in double taxation.
Additional rules can also bring deferred compensation, pensions and similar items into tax at the point of expatriation.
If you do not meet the above criteria, then you will not have the tax burden of the exit tax or the accelerated taxation of deferred income items.
If you had dual citizenship in the US and another country from birth and you continue to live in that other country, you’ll have an easier path to expatriation as you’re entitled to sidestep the covered expatriate rules. You’ll still have reporting obligations, but the tax exposure is significantly reduced.
There is planning available to avoid or mitigate the impact of the covered expatriate rules, so we recommend discussing the matter with one of our US tax experts before booking an appointment at a local US embassy, to avoid any surprises. In most cases, we would also recommend you seek the appropriate legal assistance and we can connect you with a trusted legal adviser from our network to support you with this.
For professional advice tailored to your unique circumstances, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided.
Alex Porteous
US tax
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1 March 2024
3 November 2021
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