The Pros and Cons of Renouncing US Citizenship

There’s something romantic about the idea of stepping off a plane (or boat, depending on your preferences) and into a brave new world.

While most of us have taken a holiday or vacation overseas, many have never considered giving up our citizenship. This is especially true for many US citizens, who often assume their country is the best the world has to offer.  

However, at the other end of the spectrum, the evidence suggests that there has been a decline in feelings of pride or patriotism for the United States. This is especially true for younger Americans, with only 18% claiming to feel patriotic for their homeland. While the reasons may vary, polls like this demonstrate how some US citizens negatively perceive their nation and the direction it’s taking. 

Nomad Capitalist’s founder, Andrew Henderson, decided to renounce his citizenship in 2017. He wanted to create a more prosperous future in a country that valued his success. 

And he’s not alone. Many other successful people have made the same decision, including David Saverin, the co-founder of Facebook and actor Jet Li.  

We’ve previously discussed how to renounce US citizenship, but you may be wondering if it’s the right choice for you. Many myths surround what renouncing entails, so it’s natural to feel hesitant. After all, while nothing in life is guaranteed, at least there is a sense of familiarity that comes with living in one place for so long.           

But did you know that the US is not always the best choice? 

We aren’t here to bash the United States, but we do encourage our Nomad Capitalist community to consider all options for their personal growth and prosperity. Leaving your homeland is complex and possibly frightening, but it could bring about more opportunities for you.     

But this doesn’t mean you should make this choice lightly, and that’s where our team at Nomad Capitalist can help.

We understand this can be difficult, whether you feel emotionally drawn to your homeland or are worried about the potential costs of renouncing your US citizenship. But our experts will help you make the best choice depending on your individual needs and desires through our holistic approach.   

Renouncing US citizenship is a regular topic here, but we recognise it’s not for everyone. It’s not something you do to evade criminal prosecution or avoid a tax bill you’ve already incurred. It’s a serious decision that needs to be made after careful consideration so if you want to make an informed choice you can explore the subject in this comprehensive analysis and follow up with the Nomad Capitalist articles below.

•  How to Renounce Your US Citizenship: The Ultimate Guide
• 4 Reasons to Renounce US Citizenship
• Myths About Giving Up American Citizenship
• 4 Case Studies for Renouncing US Citizenship
• Why and How I Renounced My US Citizenship: My Expatriation Story
• The Tax Consequences of Renouncing US Citizenship
• The 5 Most Famous People to Renounce US Citizenship

You need to look at the facts. There are benefits to renouncing US citizenship, but not all of them may be worth the downsides. So, let’s take a look at both the pros and cons of renouncing citizenship.

The Benefits of Renouncing

The first benefit of renouncing is perhaps the most obvious one. By escaping the US’s worldwide tax net, you can drastically reduce your income tax due burden. Although this is essentially true, there is more to it than just renouncing your citizenship and avoiding taxes.

Every nation has a tax system in place, and depending where you choose to move, the tax rates are sometimes higher than in the United States. In order to reap the full benefits, you need to make the right choices about where to move, store your money, and so on.

You will still have to pay tax on businesses that remain inside the US, but once you become an expatriate and resolve any pending tax charges with the IRS, you become an alien and are no longer required to file and pay taxes as a US citizen.

This means you won’t qualify to be taxed under the US’s worldwide tax system. In short, US citizens must file taxes in the US no matter where they reside or source their money.

Even though US citizens working or earning abroad can qualify for foreign tax credits on a portion of their overseas income, They still have to file taxes, keep accurate records, and not fall foul of often complex reporting requirements. 

However, there’s no such thing as a ‘free lunch’ – you’ll still be paying taxes somewhere – but renouncing will help reduce some of that burden, especially if you move to a low or no-tax country.      

Aside from reducing the burden of taxation, renouncing will also reduce the filing burden that all US citizens face. You will likely no longer have to file a US tax return, fill out Form 5471 for foreign companies or report your foreign bank accounts with the FBAR form.

In fact, you do not need to report any of your income to the US unless it comes from US sources. You’ll have to worry less about compliance, which frees up your time and reduces stress.

It also means that won’t have to deal with any new tax laws the US may implement in the future, either. Nor will you have to put up with the IRS suddenly choosing to pursue past taxes from 10, 20 or 30 years ago.

In fact, you’ll be done with the US tax system for good.

Along with this, you’ll also benefit from clearing up any gaps in different tax systems.

As an example, US and Canadian dual citizens often encounter issues with specific tax provisions in Canada that don’t match up with those in the US. Renouncing allows them to simplify their tax situation.

They won’t have to worry about what is and isn’t taxed by each country and which foreign tax credits they can take to offset other taxes, or if the US will even allow them to apply those credits.

Many people, not just Canadian citizens, have to deal with the gaps between the US and various tax systems in countries around the world.

Take Jack Sinclair, a poker player from London, as an example. In the UK, he can make money playing poker and gambling, and that money is not subject to tax.

But there would be little relief or recourse if Jack were a citizen of the US. He would have to pay tax on the entire amount because the US uses a different system than the UK. 

On the subject of benefits, one of the biggest myths surrounding expatriation is that people believe that they have to pack up and take everything with them when they renounce. That’s not necessarily true.

Many people who expatriate from the US have investments and financial accounts that stay behind, such as rental properties and stocks, but they still have to pay taxes on these. While this can be complicated, it doesn’t mean an expatriate can’t keep their money in the US.

If you’ve found a comfortable place in the US to bank, you don’t have to worry about being forced to abandon that banking relationship. The benefit of doing this is that the interest you earn on money in a US bank is now tax-free, as long as it is not connected to a US trade or business.      

Many people tell our Nomad Capitalist team they feel better using a different passport. They feel freer travelling as a citizen of a different country because they can bank anywhere they want without worrying about keeping up with FATCA.

They feel more liberated and may even enjoy the idea of not having to feel patriotic for a country they no longer relate to or feel they belong.

The Downsides of Renouncing

The biggest downside of renouncing for most people is that they no longer have access to the US job market. 

While some countries are opening up their immigration procedures, other developed countries are tightening them. If you aren’t a US citizen, getting a job in the US will be challenging, if not impossible.

Some people have high-paying jobs in the US and may want to consider the impact renouncing their citizenship will likely have on their lifestyle. Will you be able to get a similar job outside the US? If not, can you still make enough money to retire or start a business?

This is especially true for crypto investors looking to renounce because of US cryptocurrency regulations. If the worst should happen and cryptocurrency tanks, these kinds of investors could need to find a job and fast.

And there will no doubt be fewer opportunities in Dominica or Armenia than in the United States. People get used to having a job market to turn to, but that might not be the case if they decide to renounce. 

Despite its recent decline, the US still ranks well above other nations in the ranking criteria used by The Organisation for Economic Co-operation and Development (OECD). So, it’s worth keeping in mind that Americans are accustomed to having dozens of options, which isn’t typically the case overseas. 

Renouncing means you’ll have far more difficulties entering the United States, let alone finding a job there. If you don’t have a Canadian passport or citizenship in a Visa Waiver Program country, you’ll need a visa to visit the US and any family or friends you have there.

That is not to say it’s impossible or that there’s a campaign against people who have renounced. But it does mean that if you don’t meet all the requirements to show that you should get a visa, you might have difficulty getting back.

More minor downsides include:

• You can’t vote in elections
• You can’t get access to consular protection from the United States Consulate if you need it abroad and you can’t get an emergency evacuation from the US Government if you’re caught in a war zone.

People may think that the US embassy will protect them from all the mishaps they might get into, but the reality is that this protection isn’t as foolproof as you might think. While these factors are luxuries Americans have become accustomed to, they aren’t a deal-breaker in our book. 

The Pros and Cons of Renouncing US Citizenship: FAQs

Do the Pros Outweigh the Cons?

Overall, if you’re a successful entrepreneur or investor who is confident in your direction, then renouncing has benefits that are well worth considering.

If you recently started a business or are involved in a volatile investment like cryptocurrency, renouncing may not make as much sense. If things go wrong, you won’t have a cushion to fall back on.

In some situations, renouncing may worsen your tax situation, especially if all your money is being made from US-source investments like US stocks and properties.

Renouncing is best for those who no longer rely on the United States for money. This means they’re not investing there or working there and do not plan to do either going forward.

Too many people make the decision to renounce their US citizenship with the libertarian perspective that they’re not paying for US Government wars anymore.

But this is a decision that must be made with a level head. No one should jump into this without fully understanding the pros and cons and what they may be giving up. 

That’s why the decision to renounce US citizenship requires careful planning. That’s where Nomad Capitalist comes in.  

Our team at Nomad Capitalist has helped more than 1500 high-net-worth individuals like you find the freedom and independence they crave and rely on to continue their financial and personal journey. Reach out to us and let us guide you to the place where you’re treated best.