Is Renouncing US citizenship and Retiring Abroad Easy? 

Is Renouncing US citizenship and Retiring Abroad Easy?

Is Renouncing US citizenship and Retiring Abroad Easy? 

Is Renouncing US citizens and Retiring Abroad Easy: In general, when a US Citizen wants to retire abroad and expatriate from the USit is much more complicated than some cross-border tax services would like to make them believe. That is because as a U.S. citizen you are not able to just file a Form I-407 (which is relatively easy) — and instead have to go down to a foreign embassy complete various different documents (DS Forms), and file additional tax forms, dual status returns — that’s presuming that the Taxpayer is not a covered expatriate. Otherwise, if the Taxpayer is a Covered Expatriate then renouncing US citizenship is much more complicated and costly as it may lead to an exit tax. Here are five (5) important facts about renouncing US citizenship that Taxpayer should be aware of before doing so:

Dual Citizenship Before Renouncing US Citizenship

The first thing US Citizens seeking to renounce their US Citizenship must keep in mind before renouncing their US Citizenship, is that the United States will almost always require the Taxpayer to already have a second citizenship. That is because the US government will almost never accept a renunciation request when it would leave someone stateless or ‘orphaned.’ If a US Citizen does not already have second citizenship — there are various Citizenship-by-Investment Programs they may want to consider — but they can be expensive and time-intensive. The Taxpayer qualify for citizenship-by-lineage if they have the appropriate family tree.

Investment Visas are Expensive and May Increase Tax

It is a myth that just getting a second citizenship in a low tax country will reduce US tax liabilities. In fact, until the person formally expatriates — will have two citizenships. And, since some foreign countries have different types of tax categories than the United States does — the Taxpayer may actually end up with more tax until they formally renounce.

Form 8854 whether Covered Expatriate or Not

Not all permanent residents are required to file the 8854 expatriation statement  — only permanent residents who are considered Long-Term Residents (LTR) are required to file. Conversely, all US citizens who formally renounce their US Citizenship are required to file form 8854 in the year the expatriate — and possibly subsequent years depending on whether they still maintain certain US assets.

Exit Tax is More than Just Mark-to-Market

There is another misconception, that exit tax only involves a mark-to-market on various assets — but that is also incorrect. There may be other exit tax implications, such as Specified Tax Deferred Accounts — which are deemed distributed on the day before expatriation (such as certain IRAs). In addition, there are also deemed distributions for Deferred Compensation that is considered ineligible (primarily any non US based pension plans) — and depending on the application of any step-up basis and how much pension has been accrued during the time period of person was a US Citizen  — the Exit Tax on that alone can be substantial.

Still have US Income?

Even after you formally renounce your US Citizenship, you may still have income generated from US sources. Since after you renounce, you will be considered a Nonresident Alien, the income will either be withheld at a flat 30% tax rate (FDAP) or considered Effectively Connected Income (ECI), which usually requires the taxpayer to still file a tax return (1040NR).

Renouncing US Citizenship is Complicated

While renouncing your US citizenship may be the next step towards retirement abroad, there are various requirements traps and pitfalls to be aware of — and it is important that you discuss these in detail with your tax specialists before commencing the process of formally renouncing your citizenship.

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