By Moustafa Daly
Despite being among the most coveted citizenships in the world, thousands of United States citizens renounce their nationality every year.
In the decade ending in 2020, nearly 37,000 citizens gave up their U.S. passports with all the associated rights and liabilities, a record-high figure.
Typically, the main motivator is believed to be taxes. U.S. citizens living abroad are still legally required to file their taxes with the Internal Revenue Service (IRS), an approach known as citizenship-based taxation. The 2010 Foreign Account Tax Compliance Act further heightened tax obligations by obliging foreign governments and institutions to report assets of U.S. citizens abroad.
With an estimated nine million U.S. citizens settled abroad, including individuals who applied for citizenship by investment (CBI), the obligations and complexity of the U.S. tax system are reportedly making renouncing this nationality an attractive alternative.
“The main motivation to obtain a different citizenship (not just residency) is saving taxes on either present income or, more likely, future income and inheritances,” says Rohit Turkhud, U.S. immigration attorney.
U.S. citizenship-based tax impacts wealthier individuals more
“If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income,” says the official IRS website. “However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation.”
In 2023, the tax-exclusion threshold was set at $120,000.
In other words, U.S. expats earning $120,000 or less, presumably making up most expats, are still required to file but effectively pay nothing. This makes the tax system especially bothersome for high-earning expats, motivating them to seek other citizenships.
“Wealth is a definite ‘silent’ motivator,” says Turkhud. “I do believe the wealthier one is or is likely to become in the future, the more seriously they will consider an alternative citizenship.”
But wealth isn’t the only motivator, adds Turkhud, as “other factors, including health benefits, proximity to family, and business commitments also play a role.”
Despite record-high figures of fully expatriating Americans, Turkhud doesn’t see it as tantamount to a substantial trend. “It is the exception, not the norm,” he elaborates. “The U.S. is still one of the best countries to live in despite the challenges.”
The destinations and challenges of expatriating U.S. citizens
U.S. citizens who become expats commonly do so in favor of a European passport. “The most commonly heard of expatriating destinations are Cyprus and Malta,” Turkhud explains. “There may be other European alternatives such as Portugal - though I’m not sure how it is with the current changes there.”
“Ireland may well be on the map as well,” he adds.
With no reason for the trend to continue, Turkhud advises conducting proper legal due diligence before attempting to renounce citizenship. “It’s critical to obtain counsel and plan with an international tax advisor to ensure compliance with tax obligations and limitations.”
An exit tax may apply, particularly to high-net-worth individuals, typically with a net worth over $2 million.
Also, since 2010, a fee of $2,350 has been enforced on expatriating Americans. However, a group sued the U.S. government to reduce or eliminate this payment, and the government is reportedly considering lowering it to $450 in the near future.
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