If you are thinking about renouncing your US citizenship, you are amongst a growing number of US expats. Consider this: Last year, 2,999 Americans renounced their US citizenship, which was a 221% increase over 2012. And the trend continues, as renunciations are on pace to exceed 2013, with 1,577 renunciations reported in the first half of 2014. It may seem like the right thing to do in order to avoid the hassle of US taxes, but here are 5 things to consider before you toss your passport.
1. The decision is permanent.
Once you renounce your US citizenship, it is nearly impossible to get it back.
2. Travel to the US may not be as easy.
Prior to renouncing you need to obtain citizenship status in another country, as the US won't allow you to be "stateless" after renunciation. However, this doesn't mean it's simple to travel back to the US--it can be more difficult, depending on the citizenship. After renunciation you need to obtain visitors' visas to enter the US and visits may be limited to 120 days or less.
3. It now costs 422% more.
You read that right. The US State Department just hiked the fee to renounce from $450 to $2,350. So if you are looking for a way to shed costs long-term, you'll pay up front!
4. It may take a while.
In Canada, Americans are flocking to embassies to renounce their citizenship. But certain cities simply don't have enough appointments available. In Toronto you'll have to wait until the end of January, 2015 for an appointment!
5. You may not be immediately clear of US tax obligations.
In order to renounce, you are required to present proof of at least 5 years' worth of tax compliance. If you are not currently up to date on your taxes, you'll need to file your returns (and FBARs if required) in order to renounce. You may even be subject to an exit tax if you are what's considered a ‘covered expat'. You are a covered expat if your total tax liability exceeded $157,000 in 2014 ($147,000 for 2011, $151,000 for 2012 and $155,000 for 2013) or your income was in excess of $2 million.
The Rise in Renunciations Explained
Many blame FATCA, the Foreign Account Tax Compliance Act, for the sharp rise in Americans seeking to shed their US citizenship. FATCA is part of the US initiative to uncover tax cheats hiding money overseas. Unfortunately, many innocent US expats are feeling the effects of this Act, simply by their location. With FATCA requiring foreign financial institutions to report on the accounts of their American clients, many foreign banks are refusing to work with Americans altogether. This is causing series banking issues for expats, which may be one of the reasons they seek to shed their ties to the US.
Whatever the reason for Americans leaving the US in their rear view mirror, the trend is expected to continue. With the new fee increase, however, it may become financially impossible for some to take this step. They will be forced to comply with US tax obligations each year or risk an unpleasant call from the IRS. While you may fly under the radar for a period of time, FATCA's implementation makes it much more likely that you will be discovered. And if they find you before you come forward and file your tax returns, you will be ineligible for any IRS amnesty program. You will be at the mercy of the IRS--and no one wants that!
So whether you choose to renounce your citizenship or hold on to your passport, it is still important to remain compliant with your US tax obligations. With recent IRS program changes, you won't likely pay any late filing or FBAR penalties when you get caught up. Take advantage of this opportunity now so if you ever DO choose to renounce, the high fees and excessive wait time will be your only hurdles!