Relinquishing US status – how do you do it and what are the tax implications?
Some American celebrities spoke of leaving the US depending on the outcome of the election. I don’t know if anyone has actually followed through…yet. Nonetheless, it got me thinking back to an interesting paper presented at the 2016 Six Minute Estates Lawyer by Britta L. McKenna. The issues addressed in Ms. McKenna’s paper include what is involved in relinquishing US citizenship. Here is how you do it:
- Formally – A US citizen can formally renounce his/her citizenship at a US consulate, which process involves some initial communication and information exchange, followed by taking the oath of renunciation at the consulate. A final US tax return will need to be filed for the year of renunciation. The former citizen will be sent a Certificate of Loss of Nationality.
- Informally – A US citizen can informally renounce his/her citizenship by engaging in an expatriating act with the intent of relinquishment. A bold example – committing an act of treason. A more benign example – taking an oath of office with a foreign government.
A person relinquishing their US citizenship will be subject to the US exit tax regime if any of the following is true (with limited exceptions): (1) his/her net worth at the time is US$2,000,000 or more; (2) his/her average US tax liability for the prior five years is US$161,000 or more; or (3) the individual cannot certify that all US tax filing obligations for the preceding five years have been complied with. The tax consequences include a deemed sale of his/her assets for fair market value on the day before he/she ceases to be a US citizen, and all gains/losses are recognized.
Further, if one is subject to an exit tax regime, an inheritance tax is also imposed on certain gifts made by the expatriate (during life or death) after expatriation to a US citizen or resident. The inheritance tax (assessed at the highest gift or estate tax rate at the time of receipt) is imposed on the recipient.
Finally, a former citizen who renounces, and who is determined to have renounced for the purpose of US tax avoidance, may be denied entry into the US pursuant to its immigration laws. Ms. McKenna cites that enforcement was lacking, but that this may change. With the current political climate, I wonder if that change is already underway.
Thanks for reading and have a great weekend!
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