Giving up US Citizenship or a US Green Card
- 1. Introduction
The US is the only developed country in the world that imposes taxes not only on its residents, but also on its citizens. As a result, US citizens who have never lived in the US or who have lived abroad for many years have to pay US taxes. This obligation urges many US citizens to acquire another citizenship in order to reduce or eliminate US federal, state and local taxes. However, dual citizenship does not eliminate US taxes if one of these citizenships is a US citizenship. In order to stop paying US taxes, a US citizen must renounce his or her US citizenship.
This article describes the rules applying to persons who give up their US citizenship or a Green Card (Section 2) and explains the tax effects of giving up US citizenship or a Green Card (Section 3).
2. Rules applying to persons who give up their US citizenship or a Green Card
This section discusses the scope of the exit tax law and lists the assets that are subject, or not subject, to it.
The scope of the exit tax law
The exit tax law enacted in 2008 applies to US citizens who give up US citizenship and to foreigners who leave after they have held a Green Card for more than seven of the last fifteen years. The rules only apply to persons who meet either of two monetary tests (income tax test and net worth test). The first of these tests changes each year because it’s indexed for inflation. Persons willing to give up US citizenship or a Green Card must also certify to the IRS (Internal Revenue Service), under penalties of perjury (on IRS Form 8854), that they fulfilled all US tax obligations for the last five years. On the one hand, a person who meets either an income tax test or a net worth test, or does not make the required certification, is regarded as a covered expatriate and is subject to the exit tax. On the other hand, a person who does not meet either test and makes the required certification is not a covered expatriate and is not subject to exit tax.
Assets that are subject, or not subject, to the exit tax law
The exit tax law covers US real estates as well as gains and allowable losses. After a person expatriates, each US real property interest is covered by FIRPTA (the Foreign Investment in Real Property Tax Act). With regard to the gains, it should be noted that persons who expatriate will be taxed only if their net gain exceeds a certain amount (USD 651,000 in 2012).
When determining the net gain, subject to the exit tax, certain assets are excluded. They are subject to an alternative tax system. These assets include interests in non-grantor trusts and in eligible deferred compensation items, such as qualified pension plans, profit sharing plans or qualified annuity plans.
3. The tax effects of giving up US citizenship or a Green Card
A person who has paid the required exit tax and lives overseas will be taxed in the US as a nonresident foreign individual. However, if that person spends more than 120 days a year in the US, he may become a US resident under the presence test. The presence test is based on a variable average of days spent in the US in the course of a three-year period. For instance, for the year 2013, the presence test will take into account (1) all the days (including partial days) spent in the US during 2013, (2) one-third of the days spent in the US during 2012 and (3) one-sixth of the days spent in the US during 2011. Consequently, if a person does not want to become a US resident, he/she has to keep track of arrivals in and departures from the US as well as documentary evidence such as travel tickets and hotel bills.
- 4. Conclusion
The peculiarities of the US tax system urges certain US citizens and long-term residents willing to reduce or eliminate their US taxes to give up their US citizenship or a Green Card. In 2011, 1,780 Americans renounced their citizenship. This is a sharp increase compared with 2008, when the number was 226. While giving up US citizenship may bring financial benefits, it’s a serious matter that needs to be thoroughly considered. This is because the renouncement process is irrevocable. It leads to the loss of all rights and protections provided to a US citizen and deprive that person of using a US passport to travel.