Renouncing US Citizenship or Giving Up a Green Card
It's a big step: Alex Marino JD, LLM (US TAX) and Kevin Kirkpatrick JD, MBA, MPA, BA explain why and how to consider it
The United Kingdom and the United States share a strong bond, and US citizenship or permanent resident status allows access to the largest economy in the world. Why would a dual UK-US citizen, or a Briton who has been granted a US "green card", ever consider giving that up? Increasingly, the answer is one word: tax.
Unique among global powers, the United States taxes the worldwide income of its citizens and permanent resident status holders no matter where they live. Additionally, the requirement that a UK-US citizen or green card holder file an annual US income tax return is not waived by the fact that the United States grants a credit for taxes paid to the U.K. In fact, many US citizens living abroad do not actually owe US tax, but they can face very stiff monetary penalties for failing to file required disclosures about non-US assets in a timely manner.
US citizens who do not call America home also face the specter of estate and gift taxes following them outside US borders. Indeed, it is possible for a person who has never been to the United States to be subject to annual US income tax obligations, gift taxes on large gifts made during life, and estate tax upon death. For example, many children born abroad to US parents are automatically US citizens, and are therefore subject to US federal tax law. Individuals born in the United States are also US citizens subject to US tax, even if they left as infants and have never returned. Britons who have held US green cards are subject to US income tax and reporting obligations unless they properly terminated their status and filed final US tax returns.
None of this is new, but what is novel is increased and more sophisticated enforcement. The US Foreign Account Tax Compliance Act (FATCA) went into full effect on July 1, 2014, mandating international information-sharing on US individuals with non-US bank accounts. The United Kingdom is one of the 190+ countries worldwide who have agreed to participate with FATCA and its reporting obligations of US citizens living within its confines. With roughly 200,000 US expats living in the UK, this is an issue that has caught the attention of many.
The solution to this predicament often comes in the form of renouncing US citizenship or turning in one's green card. As US lawyers who have helped many individuals give up US citizenship or green card status, we find that clients are often emotionally and financially drained by the process of becoming US tax-compliant, staying compliant, and continually planning for cross-border tax issues. While the IRS currently offers amnesty programs to help reduce penalties for taxpayers who come forward before being contacted, getting compliant is not easy. Many US individuals who might not otherwise consider renouncing eventually find that the benefits of keeping US citizenship do not outweigh the headaches.
Renunciation carries serious consequences, including tax and immigration traps; any Britons considering it must decide if it is the right choice and then get competent advice before going through the process. Renouncing US citizenship is permanent: once the US Department of State issues a Certificate of Loss of Nationality (COLN), the only way to regain US status is through the long and difficult process of naturalization. Further, patriotism aside, US citizenship does provide certain benefits that can prove very valuable depending on an individual's circumstances: protection and consular services abroad, the right to vote in US elections, access to the US job market, and an unquestionable right to travel to the United States at any time. Renouncing provides relief from the US tax regime, but it is not for everyone.
If a British citizen decides to renounce, he or she must take precautions to avoid the imposition of the US exit tax. Under law in effect since 2008, a renouncer can become a "covered expatriate" by failing one of three key tests. If a renouncer is deemed a covered expatriate, he or she is treated as having sold all property for "fair market value" the day before renunciation and is taxed on the imputed gain in those assets (less a credit of $699,000). Gifts that the covered expatriate later makes to US citizens or residents during life or after death also become taxable in the hands of the recipient at a rate of about 40%. A renouncer becomes a covered expatriate when he or she has a net worth of $2 million or more at the time of renunciation; has an average annual US net income tax liability of more than $162,000 in?the five years ending before the date of expatriation; or fails to timely certify to the IRS that he or she complied with all US federal tax obligations for the five years preceding the date of expatriation.
There are limited exceptions to the US exit tax. The most important is that a renouncing Briton who was born a dual citizen and who still lives in the UK is not subject to the net worth or tax liability tests. Individuals who have just turned 18 also enjoy some special exemptions as it is generally difficult to renounce as a minor and a parent or guardian cannot renounce on a child's behalf. Every renouncer will always be subject to the compliance test. Thus, avoiding the exit tax requires that a renouncing individual be US tax-compliant in all circumstances.Assuming a renouncer takes the tax compliance steps need to avoid imposition of the exit tax, the actual process of renouncing one's US citizenship also has immigration issues of which to be wary. The US Immigration and Nationality Act includes a provision (known as the "Reed Amendment") that denies a former citizen reentry to the United States if the US Attorney General determines that the individual renounced for the purpose of avoiding US tax. This is an example of why potential renouncers need qualified advisors: what a renouncer says during his or her exit interview at a US embassy or consulate is critical.
Many individuals pursuing renunciation request that a US-trained and licensed attorney accompany them to the interview. This is possible at the discretion of the individual embassy or consulates. At minimum, consulting with US counsel before an exit interview will help avoid legal traps and make what can be an intense, emotional event less so.
In the end, renouncing US citizenship requires careful consideration. US immigration and tax?pitfalls are scattered throughout the process, so both understanding the repercussions of renouncing and proceeding carefully are imperative to a smooth departure from the US club and its membership fees.
Our firm will be hosting a free seminar in London on Saturday, June 17th for those who would like to find out more about the pros and cons of renouncing, and whether or not it may be the right decision for them.
About the Authors:
Alex Marino, JD, LLM (US TAX) is a US tax lawyer with Moodys Gartner Tax Law. He leads the firm's renunciation practice, and has assisted hundreds of clients in various countries with renouncing their US citizenship. He frequently presents on the topic of US renunciation across Canada and around the world.
Kevin Kirkpatrick, JD, MBA, MPA is a US tax lawyer with Moodys Gartner Tax Law. With a background in cross border tax law and accounting, his forward-thinking approach allows him to analyze the intricacies of the law and the tax code, and simplify overwhelming situations for his clients