Becoming Un-American: Record number of US citizens renounce their US citizenship

A record 4,279 people renounced their U.S. citizenship or long-term residency in 2015, according to new data released by the Treasury Department.

Last year was the third year in a row that renunciations have increased to record levels and the number of people dropping their U.S. citizenship increased by over 1,000 since 2014, according to the data.

It’s a trend that’s been increasing in recent years. Many of those severing links are Americans living overseas who are tired of dealing with complicated tax paperwork, a headache that has worsened since new regulations came into effect. Eighteen times as many Americans renounced their citizenship or long-term residency in 2015 compared with 2008. Last year was the third record-breaking year in a row.

Becoming un-American has become a protracted and costly journey, particularly in some countries, where it can take up to a year or more due to significant backlogs at the U.S. embassy and consulates. The U.S. publishes the names of people who renounce every quarter, but it does not disclose their citizenship or where they apply.

Experts say the growing number of renunciations is related to an enforcement campaign by U.S. officials against undeclared offshore accounts. It intensified in 2009, after Swiss banking giant UBS AG admitted that it encouraged U.S. taxpayers to hide money abroad.

Unlike most other countries, the U.S. taxes its citizens on all income, no matter where it’s earned or where they live. The United States is one of only two countries in the world that has citizenship-based taxation (the other is Eritrea).

As a US citizen you must file a tax return, no matter where you live, and often pay US taxes on top of the tax you already pay in your country of residence – so-called double taxation.  This has been the case in the US since the Civil War in the 19th Century and until recently really only affected the rich.  In spite of this, Americans abroad are only given a yearly foreign earned income allowance of $106,000 before double taxation kicks in.

The burden has gotten heavier in recent years with the Foreign Account Tax Compliance Act, which became law in 2010. FATCA requires individuals to report certain foreign assets and banks to disclose all foreign accounts held by Americans. Key FATCA disclosure rules take effect this year that will make avoiding filing U.S. taxes more difficult. FATCA expands the scope of what can be taxed, and places a burden on foreign banks to identify US citizens among their customers to US tax authorities. The penalty for failing to do so can be as high as 30% of all a bank’s dealings with the USA.

The United States also charges a hefty exit tax on certain people with a net worth of more than $2 million (U.S.) or annual income over $160,000.  The provisions of the exit tax apply to those deemed “covered expatriates”, defined as someone who meets any one of the following three tests:

  • Income Tax Test: The expatriate’s average annual U.S. income tax liability over the 5 years prior to expatriation was over $160,000 (the figure will be adjusted annually).
  • Net Worth Test: The expatriate’s net worth is at least $2 million.
  • Compliance Test: The expatriate does not certify that he met all U.S. tax obligations for the five years before expatriation.

If any one of these tests applies to you on the date of your expatriation, then you are considered a “covered expatriate” and the provisions of the exit tax.  There are numerous creative tax planning strategies to avoid categorization as a covered expatriate or to minimize the exit tax. You should speak with an experienced tax attorney in order to carefully analyze your situation, and discuss the implications and possibility of renunciation of US citizenship.