Surrendering a US Passport

Despite the hope that President Trump’s Tax Reform would make it easier for American citizens abroad, over the past 3 months, I have had the task of breaking the bad news. Things have actually got worse.

How so? 

For many overseas employees, who depended on certain itemized deductions like tax preparation fees, unreimbursed business expenses and moving expenses...these are no longer available.  More importantly, those hoping for a shift to territorial tax were terribly disappointed.    See more here –

https://www.derrenjoseph.com/2018/01/an-act-to-provide-for-reconciliation.html

For employers or business owners, the ability to defer taxes has been completely removed and business owners are faced with a huge bill for retained earnings.  See more here –

https://www.derrenjoseph.com/2018/02/us-exposed-owner-of-international.html

So we are seeing a bump in the number of enquiries about giving a US passport or green card.  As a citizen, what’s involved?  Firstly, you need to have a second passport as you cannot be stateless.  Secondly, there’s the immigration side and the tax side and both can be actioned concurrently. 

Immigration Process

From an immigration standpoint, the first step is going onto the US Embassy website and making an appointment to renounce it.  Depending on where you are, some embassies make you return for a second appointment but some are known to accept your US passport during the first interview.  Once the expatriation (ie the process of surrendering US citizenship) is complete, the State Department would prepare a Certificate of Loss of Nationality (CLN or form DS-4083)  https://en.wikipedia.org/wiki/Certificate_of_Loss_of_Nationality

The tax side of the expatriation process is a bit more detailed.  Your tax treatment depends on whether you’re a “covered expat” or not.  A covered expat is someone who meets any one of the 3 criteria given under the Heroes Earnings Assistance and Relief Act (HEART Act) passed in June 2008.  This applies to individuals who relinquish their US citizenship or long term U.S. residency after June 16, 2008 and who either:

1) have an average annual income tax liability of more than $155,000 for the five years preceding expatriation;

2) have a net worth equal to or greater than $2,000,000 on the date of expatriation or termination of permanent residency; or

3) have failed to provide certified compliance with U.S. tax obligations for the five years prior to expatriation.

An individual who meets one of these criteria is referred to as a “covered expatriate.” If you are not a covered expat, you need only be up to date with all US tax related filings.

Mark-to-Market Tax

The HEART Act imposes a capital gains exit tax (called a “mark-to-market” tax) upon the date of departure. A covered expatriate will be deemed to have sold all his/her worldwide assets at their fair market value on the day before expatriation.  Any capital gains on the deemed sale are taxed as income in the year of expatriation.   There is an option to defer the tax until the assets are eventually sold, but the expatriate must provide security and pay interest for the period of deferral.

Possible Consequences of Expatriation

Another concern is that after expatriation, the ability to gift or transfer property to a U.S. citizen or resident is greatly limited.  A tax of up to 40% is imposed on the recipient of any transfer or gift above the excluded amount of $14,000 per person per year.  This can also cause tax problems for U.S. beneficiaries of a trust created by the expatriate.

Expatriates may also run into immigration issues when trying to re-enter the U.S. An amendment to the United States’ Illegal Immigration Reform and Immigrant Responsibility Act of 1996 called the Reed Amendment provides that an expatriate can be permanently refused entry to the U.S. after expatriation if the Attorney General determined that you expatriated for the express purpose of avoiding U.S. tax liability.

Expatriation can be the right option in many situations but, as explained above, comes with serious implications and should not be handled lightly. Please take the time to consult tax and immigration experts before taking the leap on your own.

Please see my previous articles –

https://www.derrenjoseph.com/2014/02/americans-are-giving-up-their-passports.html

https://www.derrenjoseph.com/2014/02/renouncing-us-citizenship-if-individual.html