Thinking About Renouncing Your U.S. Citizenship or Abandoning Your Green Card? Here Are Three Questions You Should Ask Yourself First!
If you are a U.S. expatriate (for purposes of this article, a U.S. citizen or Green card holder who lives outside the United States for extensive periods), dealing with the ever-fluctuating financial and taxation landscape can be overwhelming. Wading through and trying to understand U.S. tax law is a very daunting affair by itself. Add to this the confusion that comes with the multiple tax implications for U.S. citizens living in Canada or abroad and you would be best advised to contact a qualified U.S. tax and immigration specialist.
If you are considering giving up your U.S. citizenship or abandoning your Green card to avoid the hassles of maintaining a U.S. citizenship while living on foreign soil, there are some factors you should be aware of before you make this decision.
Tax considerations alone should never be the principal driver for your decision. Simply because tax can and should be managed, as long as you work with a qualified U.S. tax advisor. What is much more difficult to manage is the presumption that you have expatriated for tax avoidance purposes. You need to be sure that you evaluate non-tax reasons first. Initially, you would look into whether you really want to renounce your U.S. citizenship or abandon your Green card. Consider whether you need to freely travel to the United States unimpeded or have the ability to work in the United States (without getting any special U.S. work visa), or whether your financial freedom of choice is limited. Would you like to simplify your life and lift any restrictions to your financial freedom (some banks refuse to work with U.S. persons, certain investments and tax incentives offered to otherwise Canadian residents, for example, are not available or available with a “bonus” to U.S. persons)?
All of this could lead you to ask, “Is it time? Will the renunciation of my U.S. citizenship or abandonment of my Green card remove stress from my life?”
Before we answer that, we need to remind you that a decision of such gravitas should never be made without reviewing your personal situation in detail. Consideration of all possible consequences (tax and non-tax related) of renouncing your citizenship are vital to a prudent decision-making process.
To plan your next move the right way, here are three important questions to ask yourself first!
Q1: How do I determine if I am a U.S. Citizen?
You can generally acquire United States citizenship in one of the following ways:
● I was born in the United States
Usually, this is it! No further analysis needed. Not only do you have an easily identifiable and permanent entry on your passport, you also are generally a U.S. citizen.
The term “United States” in this context refers to the continental United States, Alaska, Hawaii, Puerto Rico, Guam, the Virgin Islands of the United States, and the Commonwealth of the Northern Mariana Islands. The limited exceptions to this outcome are situations where children were born in the United States to foreign government consuls, emissaries, ambassadors, ministers, and the like, who hold diplomatic immunity and afford their children born in the United States diplomatic immunity. Note though, that foreign embassy employees have different standing in the United States and therefore their children may be afforded U.S. citizenship if they are subject to United States jurisdiction. At the same time, one of the determining factors may be the question of whether the child was born on the territory of a foreign state – now, that is beyond the scope of this article and requires the analysis of applicable international public law.
Interestingly, an individual of unknown native birth that is found within the United States while under the age of five years is presumed to have been born in the United States, unless birth outside the United States is shown before his or her attaining the age of 21 years.
Importantly, an individual born in the United States retains U.S. citizenship even where the individual never subsequently resides in the United States, never exercises any right of a citizen, nor even is aware of his or her citizenship
Attend Our Webinar on Dec 17, 2018 to Learn More!
For more information about U.S. citizenship renunciation and Green card abandonment, attend our upcoming webinar. Our professional tax specialists will discuss key issues about U.S. citizenship renunciation and how to approach the process the right way.
● I was naturalized after passing a citizenship test
There are certain factors that you must meet to qualify for U.S. citizenship by naturalization. You would be treated as a U.S. citizen if you were: 1. a permanent resident of the United States for at least five years (three years for filing as a spouse of a U.S. citizen and living with that spouse), or 2. you are employed by the U.S. armed forces with qualifying service to show for it. In addition, there are other eligibility prerequisites that must be met such as being able to pass the naturalization test.
● One or both of my parents was naturalized (also known as derivation of citizenship)
If at least one of your parents attains citizenship by becoming naturalized, then you, as the child can obtain citizenship under these conditions: you must possess a green card, must be below 18 years old, and must be living with the parent who has been naturalized.
● My parents are U.S. citizens, but I was born outside of the United States (derivative citizenship)
Pursuant to the Immigration and Nationality Act, an individual born outside the United States nevertheless is a U.S. citizen, at birth, if both his or her parents are U.S. citizens and if either parent resided within the United States or one of its possessions at any time before his or her birth.
Also, if one parent is a citizen but the other is a non-citizen “national” (such as, an American Samoan) their child born outside the United States is a U.S. citizen only if the citizen parent resided in the United States or one of its possessions for a continuous period of at least one year immediately before the birth.
● There are also rules covering individuals born outside the United States to one U.S. citizen parent and one non-U.S. citizen parent
For individuals born on or after November 14, 1986, if one parent is a non-citizen and the other a U.S. citizen, their child is a U.S. citizen if the U.S. citizen parent resided in the United States for at least five years during his or her life, and two of those years were after the individual reached the age of 14. For these purposes, certain types of U.S. government and military service abroad are treated as residence within the United States
For individuals born on or after December 24, 1952 and before November 14, 1986, if one parent was a non-citizen and the other a U.S. citizen, their child born outside the United States was a U.S. citizen if the U.S. citizen parent resided in the United States at least 10 years during his or her life, and five of those years were after reaching the age of 14.
There are other detailed rules that may provide for a different answer, depending on the timeline of when a person was born.
● Child born out of wedlock
U.S. immigration law makes specific distinction for children born out of wedlock when it relates to the U.S. citizenship. A child born out of wedlock may acquire U.S. citizenship through legitimation before reaching the age of 18, if certain conditions are met based on legitimation by father or mother and the time period during which the child was born.
● Children born outside of the United States and residing in the United States, including adopted children
The Immigration and Nationality Act (INA) makes it possible for foreign-born children who did not acquire U.S. citizenship at birth through a U.S. citizen parent to acquire U.S. citizenship automatically upon meeting certain conditions while under the age of 18. The child can become a U.S. citizen if at least one of the child’s parents is a U.S. citizen by birth or naturalization; the child is under 18 years of age and the child is residing in or has resided in the United States in the legal and physical custody of the U.S. citizen parent pursuant to a lawful admission for permanent residence.
There are special rules for adopted children.
Q2: What are the advantages and disadvantages of U.S. citizenship/Green card renunciation??
Relief in taxation filing and reporting commitments
Once you have taken the renunciation oath and gone through the exit interview at the Consulate General or the U.S. Embassy, you will be issued a Certificate of Loss of Nationality (COLN). Once you receive this, you will no longer be subject to U.S. tax filing and reporting requirements past the date of your renunciation, other than the requirements that you had prior to expatriation, such as filing your final year tax return.
Not being subject to future U.S. taxation laws and fluctuations
The transition tax (tax on the earnings and profits of specified foreign corporations that include controlled foreign corporations) and the GILTI (Global Intangible Low-Taxed Income Tax) tax are both very expensive for foreign corporations and U.S. shareholders. A renunciation of your U.S. citizenship would mean that you would not have to endure these obligations any longer and could enjoy major tax reliefs as a result, so long as you are not found to have been expatriating for tax avoiding purposes.
Minimized or eliminated U.S. gift and estate taxes
U.S. estate taxes are imposed on U.S. citizens and certain other classes of residents on their global incomes. The renunciation of your U.S. citizenship would mean that you will not be burdened with U.S. estate and gift tax obligations. This may provide significant relief for you and your non-U.S. citizen family as the estate tax for qualifying individuals can get expensive. Fear not, the United States will continue to have jurisdiction over U.S. property, so your U.S. vacation home will still fall under estate tax rules and gifts of U.S. property will still be subject to U.S. gift tax.
Potential difficulties when traveling to the United States
One of the impediments to renunciation of U.S. citizenship is the inability to freely travel to the United States. Often times, traveling to the United States can become complex if you do not have the proper documentation. The United States Customs and Border Protection has discretion to deny you entry to the United States if you are not a citizen. Moreover, if you have a transmittable disease or a criminal record, entry may be denied as a non-U.S. citizen. This means that you may be stopped from boarding a plane bound for the United States, turned away at the border or you may be detained or arrested if you forcefully try to cross the border without proper documentation.
Possibility of no government protection or assistance – stateless status
If you do not have another nationality at the time of renunciation, you will be declared stateless. This means that you will not be under the protection of any government and, as such, may encounter travel, work, housing and banking difficulties. If you qualified for Social Security payments as a U.S. Citizen, you may still be eligible to receive benefits even after you renounce your citizenship with a number of restrictions and with no assistance from the U.S. consulate to help you navigate the system if you are stateless.
Q3: How do I go about renouncing my U.S. citizenship/Green card?
The process of renouncing your U.S. citizenship is a voluntary act and one that cannot be reversed after you have taken the renunciation oath. The steps to do so are detailed below and may appear daunting if you are trying to do this on your own.
1. Before anything, you must determine and review your reasons for expatriating. If you are expatriating for improper reasons such as tax avoidance, you may find yourself in a more complicated situation than if you did not do anything.
2. Identify and retain a qualified U.S. tax advisor to avoid any problems you may encounter and to guide you through the process.
3. Determine your tax and non-tax consequences if you went through with expatriating. This includes an evaluation of your assets, estate plan, and potential exit tax if/when you choose to expatriate.
4. Gather all necessary documents prior to booking an appointment with the U.S. Consulate. This will include proof of U.S. citizenship, proof of citizenship in another county, any travel documents and last residency in the United States.
5. The expatriation act must be undertaken in person in front of a consular officer. You will have to reserve an appointment either at the U.S. Consulate or the Embassy to get started.
6. You will be asked to fill out certain documents and provide copies of certain documents prior to receiving an appointment.
7. You will then be assigned an appointment date and time and told which documents you need to bring with you. This will include a Statement of Understanding and an Oath of Renunciation along with an envelope to return the documents to you once they have been processed.
8. Upon attending the interview, you will meet with the consular official and you will provide your signature on a Statement of Understanding and officially submit your Oath of Renunciation. The significance of these documents is immense. They exist to let the officials know that you have undertaken renunciation voluntarily and are completely aware of the consequences of this decision.
9. At the interview you will submit your documents (passport and naturalization certificate) to the official. These will, at some point, be forwarded to the Department of State that reviews and finalizes the application.
10. The review process and subsequent confirmation could take a few months. Bear in mind that, as it is your right to renounce as and when you please, you will receive an approval so long as the paperwork is accurately filled in and supplemented by the right documentation and you are compliant with all tax reporting obligations.
11. You will receive a Certificate of Loss of Nationality (COLN) in the mail as confirmation that your renunciation is final. You will also be given your canceled U.S. passport. We recommend that you retain these documents in your files forever.
12. Finally you will file your final U.S. income tax return and Expatriation Statement with the IRS signifying your U.S. expatriation with the IRS.
Be aware that the renunciation process is rife with potential missteps if not handled carefully with severe consequences. For an action that bears such heavy implications for your future, you can never be too diligent with the details. It is always recommended to consult a qualified U.S. tax and immigration attorney to receive guidance and assistance throughout the process to make sure everything is in order and the renunciation of your U.S. citizenship is finalized in the proper manner.