If you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.
So basically every U.S. citizen is obliged to file their taxes even if you are exempt from paying US taxes. For many US expats this obligation becomes a burden that they would like to get rid of.
The only way that a US citizen is not obliged to file taxes in the USA is to renounce the U.S. citizenship - so basically giving up to be American. This is a life-affecting step to take, and for this reason you are well advised to weigh out the pros and cons if you are thinking of taking this step.
We talked to the CEO and tax specialist Olivier Wagner from 1040Abroad to give you an expert view on what to consider if you are thinking of renouncing your U.S. citizenship.
Why should someone consider renouncing their U.S. citizenship?
As it turns out, the main benefit of US citizenship is the ability to live and work in the US as you wish. The downside is the obligation to file a tax return, the compliance cost and in some cases actual tax owing.
For people that get well settled in their new home country (or the only country they know in the case of Accidental Americans), the benefit of US citizenship tends to disappear, whereas as investment income becomes a larger part of their income, it comes with various tax issues. Even if it doesn’t lead to actual tax owing, it would lead to the filing of various tax forms (and the associated compliance cost)
What is the impact of renouncing your U.S. citizenship?
As mentioned, the major impact has to do with the inability to live and work in the US as they wish.
Can you reverse the renouncement of U.S. citizenship?
A former citizen will be treated the same as any foreigner, meaning that they can acquire a green card, reside in the US for 5 years and then apply for US citizenship. A former citizen will not have any advantage or disadvantage over a foreigner who never was a US citizen.
The only instance in which someone who renounced would be able to change their mind is for someone who renounced before the age of 18 y/o (renunciation is possible starting at 16 y/o, but the renunciation of those under 18 y/o is complicated).
Someone who renounced before 18 y/o can reverse the renunciation by contacting the consulate between the age of 18 y/o and 18.5 y/o and they will recover their US citizenship.
Are there any costs involved in renouncing your citizenship?
There is a cost associated with it; you would pay 2,350 USD to the consulate at the time of the appointment. Tax compliance cost might amount to 3,300 USD.
Will my tax obligations automatically be cancelled when I renounce my U.S. citizenship?
For one thing, renouncing will not cancel any prior tax obligation. In addition, you will have been a US citizen during the year of renunciation; hence you would file your final tax return (a dual-status 104040/1040) along with form 8854.
But going back to the question, yes, after that you would no longer have to file a US tax return if you don’t have US sourced income.
Of course, if you have US sourced income, such as a rental property in the US, you would file a tax return on form 1040NR, just as any foreigner would.
In short it seems to mainly be a matter to think about if you are planning to move back to the USA for work or other reasons in the future. If you plan to work and retire away from the USA it is well worthwhile to consider renouncing your U.S. citizenship. We recommend getting professional advice from a specialist to renounce your U.S. citizenship such as 1040Abroad or others.