Renouncing US citizenship: acceptable reasons, procedure, and taxes

According to the Department of the Treasury of the USA, in the first quarter of 2024 alone, more than 300 people were expatriated. There are various reasons why Americans choose to renounce their citizenship.

Four advantages are among the most popular ones:

1. No tax liabilities. The USA has a unique citizenship-based tax system. It means the government taxes both domestic and foreign income regardless of a citizen’s whereabouts. For example, if an American citizen has been living and working abroad for the past 15 years, they still must pay taxes to the US government unless there is a double tax treaty between the countries.

Renouncing American citizenship can help avoid double taxation and switch to a more favourable tax system. For example, Caribbean countries offer more appealing tax rates.

Where to get citizenship by investment

2. Prospects of new citizenship. Some countries, such as Austria, China, India, Japan, and the Netherlands, do not allow their citizens to have multiple passports. In this case, renouncing American citizenship is the only way to obtain a new nationality.

Even when dual citizenship is allowed, holding it may lead to conflicts in legal and military service obligations. That is why some Americans prefer to change their citizenship.

3. Financial privacy. The Foreign Account Tax Compliance Act (FATCA) requires US citizens to report foreign financial assets, which can be cumbersome. Renouncing citizenship can eliminate the need to comply with FATCA regulations.

4. Less bureaucracy. US citizens living abroad often face significant bureaucratic hurdles in dealing with both US and foreign regulations. Renouncing can reduce these administrative burdens.

Disadvantages. At the same time, renouncing American citizenship entails several negative consequences:

• loss of privileges like voting rights, government protection abroad, and social benefits;

• renouncing citizenship is a complex and costly process;

• without an American passport, one might need a visa to visit the USA.

Several terms concern US citizenship. The main similarity is that all processes can result in the issuance of a Certificate of Loss of Nationality, or CLN. Although they often overlap, they have distinct meanings and implications in the context of US immigration and nationality law.

Loss of citizenship generally refers to the broader concept of a US citizen ceasing to be a citizen, whether voluntarily or involuntarily. It encompasses various scenarios, including renunciation and revoking citizenship because of fraud or other legal grounds.

Expatriation specifically refers to the process by which a US citizen voluntarily gives up their citizenship. It encompasses various methods, including relinquishment and renunciation.

Relinquishment is one of the expatriation methods. It usually requires performing an expatriating act with the intention of relinquishing citizenship.

Common expatriating acts include:

• becoming a naturalised citizen of another country;

• declaring allegiance to another country;

• accepting a policy-level position in a foreign government.

In this process, the individual performs one of these acts and then reports it to the US government, along with their intention to relinquish citizenship. The process can be retroactive to the date of the expatriating act.

Renunciation is another method of expatriation. It is a formal declaration made to give up US citizenship. It involves the following steps:

• appear in person before an American consular or diplomatic officer;

• sign an oath of renunciation;

• pay the applicable fee.

Renunciation is generally a more straightforward process and does not depend on performing any other expatriating act beyond the formal declaration. Citizenship is lost from the date of the renunciation ceremony.

Typically, in public or online discourse, the term “renunciation” is used to refer to the loss of US citizenship. However, other terms may also be used in legal contexts. For example, in reports by the American Department of the Treasury, this process is referred to as “expatriation.”

Denaturalization refers to the process by which the US government revokes the citizenship of a naturalised citizen. This can occur for several reasons:

• if citizenship was obtained through fraudulent means or by concealing relevant information;

• in case a citizen engages in actions deemed disloyal to the United States, such as joining a foreign military or government considered hostile to the US;

• being a member of organisations that are considered threats to US security.

Denaturalization is an involuntary act, while renunciation, relinquishment, and expatriation are voluntary.

The fee to renounce US citizenship is $2,350. It is neither waivable nor refundable if the renunciation application is denied. This may happen if an application is not completed properly.

The list of required documents includes:

• evidence of citizenship: a passport or a birth certificate;

• US consular report of birth abroad, if applicable;

• bio-pages of all current foreign passports;

• certificates of naturalisation for any country, including the United States, if applicable;

• certificates of citizenship for any country, including the United States, if applicable;

• evidence of any name changes, if applicable, e.g., marriage or divorce certificates.

An applicant must also submit several government forms:

• Form DS‑4079: a request for determination of a possible loss of United States citizenship;

• Form DS‑4080: oath and affirmation of the renunciation of the nationality of the United States;

• Form DS‑4081: statement of understanding concerning the consequences and ramifications of renunciation or relinquishment of US nationality;

• any other forms determined necessary to support the loss of nationality.

All forms are available on the website of the US government.

Renouncing US citizenship has complex tax implications that require careful planning and compliance with American tax laws. It is advisable to consult with a legal professional to navigate these requirements and understand the financial impact of renunciation.

Candidates must consider or, in some cases, pay several types of duties.

General tax compliance. Before renouncing citizenship, individuals must ensure they are compliant with US tax laws. They are obliged to file all required tax returns for the 5 years preceding expatriation. They must also file Form 8854, "Initial and Annual Expatriation Statement," to report their expatriation and certify compliance with tax obligations.

The IRS may impose a $10,000 penalty for failure to file Form 8854 when required.

Exit tax. The US government imposes an expatriation tax, commonly known as the "exit tax," on certain individuals who renounce their citizenship.

The tax applies to individuals who meet any of the following criteria:

• their average annual net income tax for the five years preceding expatriation exceeds a specified threshold: in 2023, it was $190,000;

• their net worth is $2 million or more on the date of expatriation;

• they fail to certify on Form 8854 that they have complied with all US federal tax obligations for the five years preceding the date of expatriation.

If a candidate for renunciation fits at least one of the descriptions, they are considered “a covered expatriate.” In this case, the IRS imposes a mark-to-market regime, which means the assets of such citizens are deemed sold for their fair market value on the day before the expatriation date. This “deemed sale” triggers capital gains tax on the unrealized gains.

Continued US taxation. When a US citizen renounces their citizenship, they are generally considered a dual-status taxpayer for the year of expatriation. This means they are treated as a US citizen for part of the year and as a nonresident alien for the remainder of the year.

For the “US citizen” part of the year, they are obliged to file a tax return on Form 1040. This form will report all income from worldwide sources earned up to the date of expatriation. For the “nonresident alien” part of the year, they must also file a tax return, Form 1040-NR, reporting only their US-source income.

Exploring alternative citizenship options might be beneficial for individuals considering renouncing their US citizenship. Several countries offer pathways to citizenship by investment programs, providing more favourable tax regimes and new opportunities for travel, business, and lifestyle.

Dominica. Investors can contribute to the Economic Diversification Fund or invest in pre-approved real estate projects. The minimum investment requirement is $200,000, and the obtainment period is at least 6 months.

Dominica does not tax wealth, gifts, capital gains, or inheritance. Non-tax residents pay taxes only on income generated in Dominica.

St Lucia. The minimum investment is $240,000. Applicants choose from five options: a contribution to a state fund, the purchase of government bonds or real estate, and business investments. Individuals obtain a passport within 6+ months.

Saint Lucia does not tax global income, dividends, inheritance, capital gains, or wages. Social security contributions for employees are 5% of their salaries.

Antigua and Barbuda. Cosmopolitans can get citizenship by investing at least $230,000. There are four options: contributions to a state or university fund, real estate purchases, and business investments. It usually takes at least 6 months to get a passport.

Antigua and Barbuda does not tax personal income, inheritance, or capital gains. Tax residents also do not pay taxes on dividends, interest, or royalties.

Grenada. To acquire Grenada citizenship, investors choose one of two options. The first is a non-refundable contribution to the National Transformation Fund, which requires $235,000+. The second is a government-approved real estate purchase that costs at least $270,000. The obtaining period is 8+ months.

Grenada does not tax individuals on global income, dividends, interest, or royalties from other countries. There are also no taxes on inheritance, capital gains, and stamp duty.

St Kitts and Nevis. Investors contribute a minimum of $250,000 to a state fund or a public benefit unit or buy real estate worth at least $400,000. Real estate investment can be returned in 7 years.

St Kitts and Nevis tax residents do not pay taxes on dividends, interest, or royalties. There is also no tax on wages, capital gains, or inheritance in the country.

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Vanuatu. Based in Oceania, the country offers the fastest and most affordable CBI program. To get a passport in Vanuatu, an individual must contribute at least $130,000. The process takes 1 to 4 months.

Investors can establish an international business company (IBC) in Vanuatu. Although such companies are not eligible to earn income in Vanuatu, they can enjoy tax incentives. The IBC and its shareholders do not pay taxes on corporate profits, personal income, capital gains, inheritance, or donations. Instead, there is a flat annual fee of $300.

Malta. In the EU, investors might get Malta citizenship by naturalisation for exceptional services through direct investment.

The minimum investment is €600,000, and the obtainment period is residency in the country for 3 years. If an investor contributes €750,000, the residence period cuts to 1 year.

1. American citizens decide to relinquish their citizenship for several reasons: for example, to optimise taxes, due to political and personal beliefs, or to get a government position abroad.

2. To avoid the risk of becoming stateless, it is crucial to obtain new citizenship prior to renouncing US nationality. Cosmopolitans might be interested in obtaining citizenship by investment in the Caribbean or Vanuatu.

3. To renounce US citizenship, one must complete the necessary forms, pass two interviews, sign an oath of renunciation, and pay the $2,350 fee.

4. It is impossible to apply for renunciation while in the US, via email, or through an agent. The only possible way is to apply in person at an embassy outside the US.

5. Renouncing US citizenship has significant tax implications. Prior to applying for renunciation, a candidate must consider exit tax, tax returns for the last five years, and continued US taxation.