Should Accidental Americans Renounce US Citizenship
Should Accidental Americans Renounce US Citizenship & Expatriate: Oftentimes, it comes as a huge surprise to US Taxpayers who have lived abroad their entire life to learn that they are actually a U.S. Citizen. While for immigration purposes this can be a benefit (since it avoids the hassle of having to apply for lawful permanent residency or obtain a temporary visa) — for tax purposes it can be devastating to learn that the Taxpayer has been out of compliance their entire life, and now has to deal with the headache that is the IRS. Luckily, the Internal Revenue Service has developed various offshore amnesty programs — which vary depending on whether or not the Taxpayer wants to remain a US person or renounce their US Citizenship. Let’s review the different factors as to why an Accidental Americans should (or should not) renounce US Citizenship and formerly expatriate.
US Worldwide Income Tax & Reporting
What makes the US tax system so absurd, is that unlike most other countries on the planet — the United States taxes individuals on their worldwide income based on their US Person status — and not residence. Most countries for example, only tax their citizens on worldwide income if that citizen is considered a resident of that country. In other words, if a citizen of a foreign country resides in a different country, then the country of citizenship typically only taxes the citizen on income sourced within that country’s borders — and not on foreign income. When a taxpayer is an Accidental American and learns of the US tax implications and consequences — but wants to retain citizenship — here are a few things to consider:
If an Accidental American Wants to Retain US Citizenship
If the Accidental American wants to retain US Citizenship then it may not necessarily result in a big tax implication. It depends on various factors:
Foreign Earned Income & Housing Exclusion
A U.S. Citizen who resides abroad can generally qualify for the Foreign Earned Income and Housing Exclusion (FEIE)– which usually excludes up to $100,000 to $150,000 in annual income and housing expenses. So, even if the Taxpayer is in a jurisdiction that does not tax personal income, they can still use FEIE to avoid U.S. tax on that income when they do not have foreign tax credits.
Foreign Tax Credit
In addition, Taxpayers who paid taxes on foreign income can usually apply Foreign Tax Credits (FTC) against any U.S. tax on that same income. Therefore, if a Taxpayer would have had to otherwise pay US tax on certain income — but they already paid foreign taxes on that same income — then they may be able to avoid U.S. tax altogether on that income.
Streamlined Foreign Offshore Procedures
In order to get into compliance for prior years, presuming that the taxpayer was non-willful and meets the foreign residence requirement, the taxpayer can file three (3) years of tax returns and six years (6) of foreign financial account statements (FBAR) — without paying any penalties — and safely get into compliance. We have detailed information about the Streamlined Foreign Offshore Procedures and have helped thousands of taxpayers along the way with offshore disclosure.
If Accidental American Wants to Relinquish US Citizenship
It is understandable that the Accidental American may have no interest in retaining their US citizenship and instead would prefer to renounce. A few years back, the Internal Revenue Service created a program designed specifically for this scenario and it is referred to as: Relief Procedures for Certain Current and Former U.S. Citizens. As long as the Taxpayer can meet the requirements of the program, then they can easily renounce — and they may not have any tax implications at the time they renounce — depending on what their total net-effective income tax liability is.
Even after the Accidental American renounces their US citizenship and formally expatriates, they can still come back to the United States as long as they qualify for one of the Visas and/or Lawful Permanent Residence (LPR). Even as an LPR, when a taxpayer is a non-US Citizen they may qualify for certain treaty benefits that are otherwise not available to Citizens — in which they can maintain LPRR status but avoid many of the harsh tax consequences reserved for Citizens of the United States.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.