By: Eli Doron, Adv; Yaron Tikotzky, Adv, (C.P.A); Dr.Slomo Nass, Adv, (C.P.A)
During the past few years, a growing number of Americans who are living outside the U.S are renouncing their U.S. citizenship. This is Due to the fact that the U.S. imposes taxes on the world-wide income of citizens and resident aliens, regardless of where they live.
How can you renounce your citizenship?
In order to renounce your U.S. citizenship, you must voluntarily and with intent to relinquish U.S. citizenship:
- appear in person before a U.S. consular or diplomatic officer,
- in a foreign country (normally at a U.S. Embassy or Consulate); and
- Sign an oath of renunciation.
Renunciations that do not meet the conditions described above, have no legal effect.
Once you expatriate, all of your future income from non-U.S. sources will not be subject to U.S. taxes: any income earned by the expatriate outside the U.S. after expatriating and any income from investments held outside of the U.S. after the expatriating would be free of U.S. taxes. Furthermore, assets that were outside the U.S. would be free of U.S. estate taxes.
The substantial obstacle facing the expatriate is the new expatriation tax: The expatriation tax applies to U.S citizens who have renounced their citizenship, and long-term residents who have ended their US resident status for federal tax purposes. The rule applies to citizens who follow any of the following statements apply:
- Their average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($139,000 for 2008; $145,000 for 2009 and 2010).
- Their net worth is $2 million or more on the date of their expatriation or termination of residency.
- They've failed to certify on Form 8854 (the Initial and Annual Expatriation Statement) that they have complied with all U.S. federal tax obligations for the 5 years preceding the date of their expatriation or termination of residency.
- The new rule imposes a mark-to-market regime, which generally means that every asset of a covered expatriate (Stock portfolios, art, real estate etc.) will be taxed on the day of the expatriation as if it was sold at it's fair market value on the day before the expatriation date.
However, you can elect to defer the exit tax until you actually sell the property, and leave the U.S without triggering immediate tax- as long as the IRS is assured that it will collect the tax in the future. In order to defer the exit tax effectively, you must provide a bond or other adequate security for the tax liability.
Despite the new expatriation tax, renouncing your U.S citizenship is an option that should be kept in mind by every American nowadays, for its taxation advantages.