Considering renunciation Part 1? The Problem is HOW To Make The Renunciation Decision

For Americans U.S. citizenship is an asset that depreciates with age. U.S. citizenship is more valuable for younger people beginning their careers than for older people moving toward retirement. The United States is a large market with many career and employment opportunities. In addition, older people often live off capital, (which if “foreign” to the United States) comes with punitive U.S. taxation and reporting.

There are many reasons to retain U.S. citizenship or to renounce U.S. citizenship. It is a “circumstance dependent” decision. To be clear, the process of renunciation is relatively easy. Renunciation is a process that takes place under the Immigration and Nationality Act. That said, the fact of renunciation has consequences that extend well beyond the Immigration and Nationality Act.

What follows is a list of “some” specifics people should consider as part of making the renunciation decision. This is a “quick and dirty” post. I make no attempt to detail the specific reasons why these considerations may be important. This list is intended only to “raise your level of awareness” about a decision that has long term implications in your life.

The renunciation decision requires a tolerance for uncertainty.

Deciding whether to renounce is a decision made in an uncertain environment. Where there is uncertainty one must think in terms of “better vs. worse” outcomes. Not “right vs. wrong” outcomes.

On the one hand one never knows what the future could hold.

On the other hand U.S. citizenship carries many present and future costs.

The process of renouncing U.S. citizenship is easy.

The process of understanding the implications that renunciation may have on your life are neither easy nor well understood.

How to think generally about renunciation – “it’s a better vs.worse question”

For some people:

We are not all Tina Turner. “Some” questions that should be explored by all …

What follows are some questions and video discussion where some of the questions are explored in greater detail:

Part 1 – February 6, 2024

Part 2 – February 13, 2024

I. Would you be a “covered expatriate”? If so, you are subject to the 877A expatriation tax AND your beneficiaries may be subject to the “covered gift” rules.

II. Are you calculating your net worth properly? What is to be included? What not? How are joint interests to be valued? How are pensions to be valued?

III. Are you able to certify tax compliance for the five years prior to the year of renunciation? What does that mean?

IV. Do you have a non-U.S. pension? How might that factor into the decision? What about U.S. pensions? How are U.S. pensions treated differently from non-U.S. pensions?

V. if you would be a covered expatriate would you actually pay the 877A expatriation tax? If so, which aspect of the Exit Tax? Pensions? Mark to market? Specified tax deferred accounts? Some “covered expatriates” are required to pay an exit tax and some not.

VI. Do you have U.S. persons who in your life who you might wish to make recipients of gifts/bequests from you? Remember, “covered expatriates” who make gifts/bequests to “U.S. persons” (directly or indirectly) may subject the recipients of their gifts/bequests to a significant tax. This is the reason for the “family renunciation”. In the 21st century:

“A family that renounces together, bonds together.”

VII. Can you arrange your affairs to avoid “covered expatriate status? Gifts? Divorce? Sell assets and realized gains?

VIII. Are you entitled to any exemption from “covered expatriate” status (regardless of net worth)? A common example is the dual citizen from birth exemption to “covered expatriate” status.

IX. After renunciation will you have income streams from the United States. If so, what kinds of income streams? Remember that many U.S. income streams may be taxed differently after you renounce. To be clear:

For U.S. tax purposes, after renunciation you are taxed on U.S. source income as a nonresident alien! How does this affect your situation?

X. After renunciation will you have assets located in the United States? Remember that after renunciation you will neither be a citizen of the United States nor domiciled in the United States. U.S. situs assets will be subject to a very punitive estate tax. The sale of U.S. real estate will be subject to the FIRPTA rules.

XI. What citizenship will you be left with. Do you care about access to the United States. Will renunciation of citizenship impair your global mobility?

XII. How would renunciation affect your entitlement to benefits under tax treaties? Would you lose any treaty benefits (Hello residents of France)?

XIII. Many U.S. citizens are able to pass their U.S. citizenship to their children. Renunciation would make it impossible to pass U.S. citizenship to any child born AFTER renunciation.

XIV. Renunciation of U.S. citizenship means that the one ceases to be a U.S citizen or resident. In certain circumstances those who have renounced may have U.S. situs assets. It is important to understand that the death of the former U.S. citizen may subject the estate to an Estate tax on those assets that would not apply to a U.S. citizen. This requires the filing of Form 706-NA in order for those assets to be released. This can take more than one year.

XV. Continuing the discussion of former U.S. citizens who die with U.S. situs assets … It is important to understand the difficulty of actually getting access to those assets. It can be a long and frustrating process. It requires the filing of Form 706-NA in order for those assets to be released. This can take more than one year. (And you thought that renouncing U.S. citizenship would allow you to live “Form Free” …

XVI. U.S. citizenship is a requirement for various other things (including being a shareholder of an S corp)

John Richardson – Follow me on Twitter @Expatriationlaw

Leave a Reply