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Finance • Legal Tax Reduction

Expatriation Tax Planning for Citizens Leaving The US

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‘The two hardest things to say in life are hello for the first time and goodbye for the last.’

American author Moira Rodgers could have been discussing renouncing US citizenship when she wrote those words. At face value, her words point out that starting afresh and cutting old ties are complicated, tricky moments in life.

But what if saying goodbye was the gateway to new opportunities? What if accepting a certain amount of temporary discomfort was an inevitable part of making progress in achieving your life goals? 

Welcome to the quandary facing US citizens considering whether to renounce their citizenship: Should they? Shouldn’t they?

Sometimes, there is no option other than to boldly step through the looking glass and embrace the life beyond. Those who do understand that the first step is the hardest – it’s not easy to say goodbye to US citizenship and try to establish oneself in a new country. 

Leaving The US

What Does Renunciation Mean?

Renouncing US citizenship is an irreversible legal process allowing applicants to formally relinquish their nationality. 

By choosing to renounce, you also give up your claim to all of the rights that come with US citizenship.

This includes the right to vote in US elections, receive government protection and consular assistance abroad, bestow citizenship on children born overseas and have access to the US job market. You also give up the right to unrestricted travel in and out of the US.

Regardless of where they live, all US citizens must file an annual tax return to report their worldwide income to the Internal Revenue Service (IRS). There’s no way around it for US citizens: renunciation is the only legal way to relieve yourself of the US tax burden fully, thought that’s not the only reason many have done it.

Other motivations include wanting to live and fully integrate with another nation and culture, frustration with US politics and general dissatisfaction with American life. 

While renouncing is not for everyone and must be considered carefully, for many expats the move comes with benefits that are worth pursuing.

What Does Renunciation Mean

The Exit Tax and How It Works

When it comes to renouncing US citizenship and the exit tax, taking time to get your affairs in order can dramatically reduce your taxes before you leave.

Essentially, when you’re a US citizen, the US Government imposes a market-to-market exit tax on all of your assets on the day of your expatriation. The trouble is that expatriation taxes can be a little confusing, so it’s essential to prepare beforehand.

The day before you go in and raise your right hand to swear that oath of renunciation, you will need to calculate your net worth and file a final tax return with the IRS.

This includes the value of your businesses, the cash you have and all of your assets. As such, the exit tax is a hypothetical sale of your assets on the day before your renunciation. You’re not really selling them, but the IRS will act as such. 

That means, for example, that if you bought shares worth US$1000 which are now worth US$1800, there is an unrealised gain of US$800. Therefore, this amount is realised if you are a ‘covered’ expatriate and subject to the exit tax calculation.

‘Covered’ expatriates, who are subject to the current expatriation tax rules, may be required to pay an exit tax if they decide to renounce their US citizenship. The exit tax is essentially a Capital Gains Tax (CGT), calculated based on the deemed sale of all their worldwide assets. The value of these assets is determined as of the day before the expatriation takes place.

The exit tax applies to those who have a net worth of over US$2 million, anyone who is not tax compliant or anyone with an average net income tax over the past five years that exceeds the threshold. This specified amount for the average annual net income tax for the five years ending prior to expatriation is adjusted for inflation. 

The exit tax rate is up to 23.8%, but you only pay an exit tax on unrealised capital gains. You don’t pay again for anything you have already been taxed on. 

Under the IRS’s mark-to-market regime, all property of a covered expatriate is deemed sold for its fair market value. The amount that would otherwise be included as gross income through the deemed sale is reduced by an exclusion amount of US$866,000 in 2024.

You are required to submit your tax return for the previous five years and list all of your worldwide assets and it’s your responsibility to be compliant.

Getting Dual Citizenship Benefits US Taxes

Minimising The Expatriation Exit Tax

Gifting is the most important way to plan to reduce your exit tax liability. For couples, suppose one person is renouncing and another isn’t: in that case, this strategy minimises the exit tax on assets like property that will still be held in the US after renunciation by gifting those assets.  

You can gift your assets to your spouse, kids, or even a trust. Every individual gets the lifetime gifting exemption, which means they can gift up to a certain amount tax-free. 

Based on the current lifetime gift exclusion of US$13.6 million, assets up to that value can be gifted tax-free. As those assets will still be taxed in the US, even if you renounce, you can legally reduce your exit tax bill if you gift them.

Donald Trump raised the exclusion amount in the Tax Cuts and Jobs Act and it will revert to US$5 million, adjusted for inflation, in 2025.  For example, an individual with a net worth of US$3 million could have gifted their assets to the extent that this would put their net assets below the US$2 million threshold and not pay an exit tax. 

On the other hand, if your net worth is US$50 million, that same process will be more difficult. Still, with some legal tax planning, whether by gifting or proving the value of certain assets is actually lower than first listed, substantial savings are possible. 

It’s important to note that you cannot gift in the same year as the renunciation. So, ideally, you would make the gift one year and then wait a whole year or until January 1 of the following year to actually renounce.

As ever, planning this is crucial.  

Consider for example, the situation of a couple, when one person expatriates and the other doesn’t – the covered expat spouse can gift all the assets to the spouse that remains a US citizen.

When one person in a married couple renounces and the other doesn’t, it does not mean they have to stay in the US – they can still move with the one who has renounced. For example, if one spouse is the breadwinner, the company owner and the one that holds most of the assets, for tax savings purposes, both of them do not need to renounce.

That’s because there is a misconception that because you’re married, you both have to renounce. The Nomad Capitalist team has been banging on about this for some time – see our Myths About Giving Up American Citizenship for more details.

When you decide to leave, the IRS is entitled to a last bite at the apple on your worldwide assets, so it’s vital to be prepared. You must declare all your assets when you expatriate in a tax return on Form 8854, and you must self-assess these.

Another strategy for optimising exit taxes is planning for a fair market valuation of a company after you leave. By getting professional tax advice, it’s possible to make the argument that the value of the company is tied to you as an individual and that without you, the company is not worth as much, thus lowering the amount payable to the IRS. 

How to Renounce US Citizenship 

Renounce your citizenship

The first step is to take the test to be treated as a covered expatriate. This requires:

  • Passing the average income liability test by having an average annual net income tax liability of the five years preceding the year of expatriation that exceeds US$201,000 for 2024
  • Having net assets of US$2 million or more at the expatriation date 
  • Ensuring federal tax compliance for the five tax years preceding the one in which expatriation occurs.

After you decide to renounce, you must set and attend two different appointments at a US embassy or consulate.

At the first interview, you will be asked to complete a DS-4079 renunciation questionnaire. The questionnaire lists all the questions about where you are naturalised, whether you were born a US citizen, your citizenship of another country and so on. 

During the interview, you will have to elaborate on why you want to renounce your US citizenship. 

The initial interview establishes that you are renouncing of your own free will and that you’re aware of the consequences. Then, depending on the embassy or consulate, you may be asked to return for a second interview.

The most important question you will probably be asked is why you are renouncing. One reason the US Government does not accept is that you want to renounce for tax purposes. To learn more, see our Ultimate Guide to Renouncing US Citizenship

You will complete several documents throughout the process, including the forms DS-4080, 4081, 4082 and 4083. You are then required to take an oath stating that you want to renounce.

A fee of US$2350 must be paid and, on the tax side, you must file your final US tax return on the day before you renounce and list your assets. 

If you are retaining US-source income from assets like pension and property you may have to continue to file Form 1040 after you renounce. In truth, the process has not been made easy for applicants, but the benefits can far outweigh the efforts.

Planning To Reduce Exit Taxes?

Financial Freedom

The best way to reduce exit tax is to reduce your personal net worth by strategically distributing your assets between yourself and your spouse and dependants.

Don’t forget the exemption that exists on the deemed sale of property, your right to seek a fair valuation of a company and a reduction if you have valid reasons. 

Expatriation Tax Planning: FAQs

What does it mean to renounce US citizenship?

It’s the legal process of formally surrendering US nationality. Once done, it cannot be reversed and means the rights that can be claimed as a US citizen no longer apply.

What are the benefits of renouncing US citizenship?

Renouncing US citizenship allows you to become a citizen of another country, with the possibility that better financial, tax and lifestyle benefits are available elsewhere. Renouncing also means that, regardless of you live and work, you are no longer liable to pay US citizenship-based taxes or report your income to the IRS.

What happens to my taxes if I renounce?

The day before you renounce you must file a final tax return with the US Government. This includes your tax return for the previous five years and all your worldwide assets, property, cash, businesses and so on. An exit tax is calculated on the hypothetical sale of those assets. 

What is a covered expatriate?

A covered expatriate is one that must pay an exit tax if renouncing US citizenship because they are ‘covered’ under the US tax code.

What is the exit tax and who pays it?

An exit tax of up to 23.8% is calculated on any unrealised gains from the deemed sale of all assets of a covered expatriate – tax compliant individuals with a net worth of over US$2 million and an average net income of over US$201,000 for the five years before renouncing.

Can I avoid paying an exit tax?

As a covered expatriate, you cannot avoid the exit tax but with careful tax planning you can legally minimise it. Typically, the strategies used to reduce the exit tax are gifting to a spouse, children or a trust up to the limit of your tax-free exemption and seeking a fair valuation of any businesses you own on renouncing.

The Final Piece of Your Puzzle

So, this has been an overview of how the exit tax works but everyone’s biggest takeaway is that renouncing US citizenship can be a tax and legal minefield. So, if you’re looking for for a Plan B you will need to plan this carefully. 

At Nomad Capitalist, we work with international tax attorneys and tax accountants to coordinate global plans for people who intend to renounce. There’s a lot to think about, and mistakes can be costly. If you’re planning on renouncing, you need a plan for what happens with your banking, your businesses, your investments, and your taxes when you leave. 

We help seven- and eight-figure entrepreneurs and investors create a bespoke strategy using our uniquely successful methods. This will allow you to keep more of your own money, create new wealth faster and be protected from whatever happens in just three steps. Discover how we do things here.

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