In somber language, Section 349(a)(5) of the Immigration and Nationality Act details a U.S. citizen’s right to renounce his or her citizenship by voluntarily “making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State,” and by signing an oath of renunciation.
After hitting a record high of 5,411 in 2016, the number of Americans renouncing their U.S. citizenship has declined for the past two years, according to the U.S. Treasury, falling to 3,981 in 2018, down 22% from 5,133 in 2017. Nonetheless, it remains near historic highs. What does renouncing your citizenship entail?
- Giving up U.S. citizenship means giving up all benefits, such as voting rights, government protection should you need help while abroad and citizenship for children born outside the United States.
- Renunciation is a lengthy process that involves extensive paperwork, interviews, and fees; it is also a process that is typically permanent—you can't change your mind and regain your citizenship.
- Some Americans have renounced their citizenship because of new laws that require taxpayers to report foreign-held assets to the IRS, and to pay "double" taxes, both in the U.S. and abroad.
- Other people have renounced their citizenship for personal or political reasons, such as opposing a war that the country is engaged in or objecting to a political party or elected official.
- Under U.S. law, citizenship can be terminated for reasons such as becoming a citizen of a different country, fighting in a war for a different country against the U.S. or attempting to overthrow the U.S. government.
The Process and the Impact of Expatriation
Abandoning citizenship has serious consequences: You give up the benefits granted to U.S. citizens, including the right to vote in U.S. elections, government protection, and assistance while traveling overseas, citizenship for children born abroad, access to federal jobs, and unrestricted travel into and out of the country.
What's more, renunciation is not as easy as throwing out your passport. It’s a lengthy legal process that involves paperwork, interviews, and money. Because of the increase in the number of U.S. citizens seeking renunciation, the U.S. Department of State raised the fee for renunciation from $450 to $2,350, more than 20 times the average cost in other high-income countries. In addition, some high-income citizens may owe a type of capital gains tax called an “exit tax” (officially called an expatriation tax).
It’s important to recognize that in nearly all cases, a renunciation is an irrevocable act, meaning you won’t be able to change your mind and regain U.S. citizenship. Despite these (and other) consequences, more and more people are choosing to renounce their U.S. citizenship. Here’s why.
To offset the decline in people renouncing their citizenship, the U.S. government boosted the fee from $450 to $2,350, making it more than 20 times the average cost of other wealthy nations.
Why So Many Renunciations?
While the reasons for abandoning citizenship vary from one person to the next, the recent spike in numbers is largely due to newer tax laws, including the Foreign Account Tax Compliance Act (FATCA) of 2010. According to the IRS, FATCA is “an important development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore.” FATCA focuses on reporting by:
- U.S. taxpayers about their foreign financial accounts and offshore assets
- foreign financial institutions regarding financial accounts held by U.S. taxpayers or
- foreign entities in which U.S. taxpayers hold a substantial ownership interest
Under FATCA, certain U.S. taxpayers with financial assets outside the U.S. that total more than the reporting threshold must report their assets to the IRS, using Form 8938, Statement of Specified Foreign Financial Assets (the threshold varies based on your filing status and whether you live in the U.S. or abroad).
The IRS warns there are “serious penalties for not reporting these financial assets.” It should be noted the FATCA requirements are in addition to Form 114, Report of Foreign Bank and Financial Accounts (FBAR), the long-standing requirement for reporting foreign financial accounts. The penalties for failing to comply are significant, and, in some cases, involve criminal liability.
In addition to financial reporting requirements is the issue of double taxation. Unlike most countries, the U.S. has citizen-based taxation, meaning citizens are taxed regardless of where in the world they live and where they earned their income. While foreign tax credits can reduce the tax burden, they do not eliminate all double taxes, particularly for higher-income earners, who end up filing and paying taxes both in the U.S. and abroad.
The current tax laws – and the reporting, filing and tax obligations that accompany them – have made many Americans choose to renounce their citizenship, not just because of the money, but because they find the tax compliance and disclosure laws inconvenient, onerous and even unfair.
One other side effect of FATCA – and the requirement for foreign financial institutions to report information to the U.S. regarding U.S. citizens’ accounts – is that many foreign banks don’t want to deal with American clients at all. As a result, many U.S. citizens have been turned away by financial institutions abroad, a frustrating problem if you live overseas and want to pay your bills.
The number of people who have renounced their citizenship in the first quarter of 2019—the most recently reported quarter—according to the U.S. Treasury.
Other Reasons for Renunciation
Historically, Americans have occasionally renounced their citizenship for other reasons. For example, opposition to U.S. policy during the Vietnam War. Certain acts can also cause an individual to lose U.S. citizenship without formally renouncing it. Under the Internal Revenue Code and/or the Immigration and Nationality Act (found in Title 8 of the United States Code), citizenship can be terminated (and therefore relinquished, not renounced) for several reasons, including:
- Applying for and becoming a naturalized citizen of another country
- Making an oath of allegiance to another country
- Joining the armed services of another country engaged in a war against the U.S., or joining the armed services of another country as an officer
- Working for a foreign government while simultaneously a citizen of that county
- Accepting employment by a foreign government in a job where an oath of allegiance, affirmation or other formal declaration of allegiance is required
- Renouncing U.S. citizenship in a time of war, with the U.S. Attorney General’s approval
- Committing an act of treason or an attempt to overthrow the U.S. government by force (and being convicted by court-martial or a civil court)
The Bottom Line
Today, tax laws are resulting in record numbers of people renouncing their U.S. citizenship each year. But it’s not as easy as putting your passport through the shredder. Because the law states that those wishing to renounce their U.S. citizenship must do so in person before a U.S. consular or diplomatic officer while in a foreign country, U.S. citizens cannot renounce their citizenship by mail, through a third party or while in the United States.
Renunciation has significant consequences. Aside from giving up the benefits granted to U.S. citizens, the U.S. Department of State advises that anyone considering renunciation of their U.S. citizenship should understand that, in almost all cases, the act is irrevocable. An exception: A person who renounces his or her citizenship before the age of 18 can have that citizenship reinstated by notifying the Department of State within six months of turning 18.
Renouncing one's citizenship is one of the most solemn decisions anyone can make. Carefully weigh the pros and cons for yourself and your family. It is also recommended that you consult with an experienced tax professional to understand the tax consequences of renunciation.