23 March 2018
Recent data published by the IRS shows that, yet again, the number of US citizens expatriating continues to be on the rise. More than 5,400 individuals relinquished their US citizenship in 2016, which is more than a 25% increase over the number of individuals relinquishing in 2015. If the number of expatriations in 2017 continues to increase, it will be interesting to see (although perhaps difficult to quantify) whether these expatriations are motivated by reasons other than the complexity of the US tax system such as the growing political discord in the US. Given this political tension and the increasing attractiveness of relocating to, for example, Canada, this is a good opportunity to revisit the expatriation procedure and a few material US tax considerations.
First, some US embassies require two in-person appointments with a US consular official following the submission of identifying documents and various paperwork. However, there are some embassies, like the US embassy in London, which generally only require one in-person appointment after the submission of identification documents and paperwork. An Oath of Renunciation is sworn after a consular official ensures that the relinquishment is voluntary and undertaken with a full understanding of the implications and potential consequences. Although it may take between four to six months to receive a Certificate of Loss of Nationality, the expatriation is effective as of the date the Oath of Renunciation is sworn at the US embassy.
For some expatriates (eg those with a net worth over $2m) an 'exit-tax' may apply and the expatriate will be deemed to have sold all of his/her assets on the day before expatriation at fair market value. The net gain in excess of $699,000 (adjusted for inflation) will be subject to US federal income tax. Some exceptions apply to the imposition of the exit tax, provided the expatriate has been US tax compliant for the five years preceding his/her expatriation. A common exception is the 'dual citizen' exception which provides that the exit tax will not apply if the expatriate (i) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country and (ii) has been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs.
After the expatriation, the individual must file his/her final US federal income tax return along with Form 8854, Initial and Annual Expatriation Statement.
It is also important to note that although almost 5,500 individuals relinquished their US citizenship, hundreds of thousands of individuals also naturalize as US citizens on an annual basis. In our next newsletter, we will discuss common issues individuals face when acquiring US citizenship.