Five Reasons Why People Renounce US Citizenship

When it comes to anything offshore, it’s difficult to entirely understand what you’re doing until you’ve done it. 

Nomad Capitalist founder Andrew Henderson, who has been through the process of renouncing US citizenship, understands that the same principle applies to such a monumental decision as giving up one’s passport.

The myths and misconceptions surrounding the process of US citizenship renunciation disguise the relative simplicity of what it means to renounce. 

The truth is that, as a citizen of a country, you have certain rights and responsibilities. You’re allowed to give up those responsibilities, but doing so costs you the associated rights.

For both ultra-wealthy individuals and ‘accidental Americans’ who choose to give up their passports each year, these associated rights aren’t worth the effort required to maintain them.

For many, the administrative burdens of maintaining US citizenship while living abroad, such as complex tax obligations and compliance, have become increasingly unjustifiable. Others seek relief from financial reporting requirements or wish to simplify their global lifestyle. 

Others simply don’t connect with the US anymore and feel better aligned towards a different citizenship.

Understanding the reasons why people renounce US citizenship requires unpacking a variety of personal, financial and legal factors that inform their decision. This article explores some of the main reasons behind this growing phenomenon.

If you’re thinking about renouncing your US citizenship, pay attention to your own situation. 

And if you’ve already made your decision and you’re looking for specific instructions on how to renounce your citizenship, you can read our ultimate guide here.

Five Main Reasons Why People Renounce US Citizenship 

Everyone has their own reason for renouncing their citizenship. However, here are five of the main ones. 

1. Citizenship-Based Taxation 

The big thing you hear in the news when the topic of renunciation comes up is taxes. 

Why are taxes at the top of the list of reasons to renounce US citizenship? Because renunciation is the only legal way to fully relieve yourself of the US tax burden.

This is all thanks to the United States’ use of citizenship-based taxation. 

Long after every other country abandoned the idea, the US hung on to the concept of taxing citizens no matter where they live on the sole basis of their citizenship.

This creates a unique set of challenges for expats, especially those who spend very little time in the US. For other people, it’s more about the details surrounding paying those taxes.

For example, at Nomad Capitalist, we once had a client whose biggest issue and motivating drive for renouncing his US citizenship was compliance. 

He ran several businesses in the United States that paid significant taxes. Additionally, he managed numerous other enterprises globally that did not pay taxes. 

We went through everything he was doing and found that, after some of the tax laws that came out under the Trump America First Tax Reform, his taxes were about to become much more complicated. 

A tax lawyer estimated that he would probably be paying US$70,000 to US$80,000 a year just to do his taxes.

Not paying them. Just filing them.

When he found out how much he was going to have to pay just to comply with all the new provisions and hire representatives in all kinds of different countries, he was overwhelmed. 

It wasn’t worth the worry. So, he renounced.

2. Transition Tax

The 2017 Tax Cuts and Jobs Act introduced a ‘transition tax‘ that blindsided many Americans living abroad. 

This tax, a relic of the Trump tax reform, targeted those who had resided overseas since the previous tax overhaul in 1986.  

It applied a hefty 15% levy on their undistributed foreign earnings accumulated over the past 30 years – earnings that were previously untaxed by the US government.

This was money that they had distributed or kept in a company and that the US previously hadn’t taxed. 

The retrospective nature of the transition tax meant that people in high-tax countries, some living in cities like London, now had to declare dividends from their UK company, take the money out, pay UK tax and then give that money to the US.

This wasn’t about cracking down on tax evaders squirrelling money away in offshore havens. This tax ensnared those who had been compliant with the laws of their resident countries, leaving them feeling trapped and unjustly targeted. 

Many, facing this unexpected financial burden and the complexities of navigating an already convoluted US tax system, opted to renounce their citizenship rather than endure further complications. 

3. FATCA

If you’ve watched a few Nomad Capitalist videos or have read a few articles surrounding US taxes (or if you’re just a high-net-worth individual living abroad), you’ve likely heard about FATCA. 

The regulations put in place under FATCA require Americans to not only report, pay, and file all their taxes but also do the same for foreign bank accounts, foreign brokerage accounts, and many other types of accounts.

In addition to overcomplicating things for Americans, FATCA also created complications for the people and organisations who work with those Americans. 

The burden of this compliance has pushed many people, businesses and banks to stop working with US citizens entirely.

We’ve worked with numerous clients over the years who’ve been running international businesses and suddenly have trouble getting credit, bank accounts and, in some cases, even getting contracts. 

This is all because companies just won’t do business with US citizens. They don’t want the exposure or complications.

The 2017 Tax Cuts and Jobs Act further exacerbated the situation, eliminating loopholes that previously allowed expats to defer taxation on foreign earnings. 

This means that anyone interacting with US citizens in a business or financial capacity is potentially pulled into the vortex of US tax compliance, forced to endure complex reporting requirements and calculations. 

The cumulative effect of these regulations is a sense of frustration and disillusionment among American expats. 

The US tax and compliance infrastructure, already cumbersome, has become an insurmountable obstacle for many. 

While renouncing US citizenship may not be the ideal solution for everyone, it’s increasingly viewed as a means to escape the suffocating grip of FATCA and unlock global opportunities.

Notably, a few years ago, we looked at several case studies of individuals and their reasons for renouncing US citizenship and calculated the ROI on their decision to get a second passport and renounce. 

As with the individual cases we analysed, you may discover that renunciation is well worth the effort.

4. Cultural Identity

Taxes, finances, compliance and limiting bureaucracy aren’t the only reasons to renounce US citizenship. Some choose to renounce US citizenship for reasons of cultural identity. 

Mismatched cultural identity is, in fact, a very big reason people choose to expatriate, no matter their original citizenship.

One of our clients, for example, simply did not identify with his British heritage and chose to use his US passport instead. 

Another client said he’d simply prefer to be a citizen of a country in the Caribbean. He wanted to sell some of his cryptocurrency and invest in a new passport because he didn’t want to be associated with the US. 

This is fair, and it’s an increasingly common reason why Americans are renouncing their citizenship – especially in an era of increasingly tense political division.

If you don’t feel like you fit in, it’s hard to associate yourself with the rights, responsibilities and reputation of your home country.

There’s a whole list of things that people feel about their citizenship and not everyone feels like they really fit in, especially in a country like the United States. 

While a US passport is one of the world’s best passports, a lot of people don’t want to be associated with it. They’ll gladly trade it for another passport and deal with the slight hassle of getting a couple of extra visas to remove the burden from their lives.

When they do, they often find places where they feel comfortable. Places where people share their values.

5. Location Independence

Other Americans are renouncing their citizenship because they want to live and work abroad without the drawbacks of US citizenship.

The rise of digital nomadism has transformed the way people work and live, with many opting for remote worker visas to travel and reside in multiple countries. 

However, maintaining US citizenship often conflicts with the freedom this lifestyle offers. 

Again, complex tax obligations, residency rules and compliance burdens can stifle the flexibility nomads seek. 

For these individuals, renouncing US citizenship becomes a strategic move to unshackle themselves from these constraints and fully embrace a location-independent lifestyle. 

Such countries currently include popular places like Spain, Portugal and Costa Rica, where you can qualify for multi-year residencies by showing you earn as little as a couple thousand euros per month.

If you’re willing to stay long enough, and most Americans are once they unshackle themselves from the grips of the false ‘American Dream’, you can gain citizenship in as quickly as five years in places like Portugal.

In the past, this likely would have required you to leave your comfortable job that pays in US dollars. 

However, as remote work opportunities are becoming more common, you can now enjoy the benefits of both – which is why many are seizing these chances and leaving the United States.ty and values.

Five Reasons Why People Renounce US Citizenship: FAQs

Is Renouncing US Citizenship Right for You?

Regardless of the reasons why so many Americans are renouncing citizenship, there is much to consider when determining your own reasons for renouncing your US citizenship.

The bottom line is that, for many expat entrepreneurs, renouncing their US citizenship will come with benefits that may be worth pursuing.

Most are already paying plenty of taxes where they’re living – which is likely somewhere that aligns more with their professional and personal values. Renouncing will help them restrict the reach of the US government in their lives.

We have plenty of articles and videos on the subject, including our ultimate guide that can help you figure out how renouncing could be beneficial in your specific situation.

But whatever works for you, there are many people who’ve decided that giving up their US passport has allowed them to live where they’re better off. Renouncing allowed them to go where they were treated best.

If you want help determining if and how you should renounce your US citizenship as part of a holistic offshore plan, feel free to reach out to the Nomad Capitalist team.