There are several important options to consider when renouncing U.S. citizenship, including the recently introduced Relief Procedures for Accidental Americans. We have outlined a few of the main considerations below:
Expatriation Tax
Under current U.S. income tax laws, if a U.S. person (citizen or long-term lawful permanent resident) gives up U.S. citizenship and residency status, he or she will be subject to expatriation tax rules if any one of the following three conditions applies:
(1) The average income tax liability for the 5 taxable years immediately before the year in which citizenship or residency status was relinquished exceeded a certain threshold ($165,000 for 2018*).
(2) The individual’s net worth on the date before relinquishing citizenship or residency status is $2 million or more.
(3) The individual had not complied with the U.S. income tax reporting requirements for the 5 taxable years immediately before the year in which citizenship/residency status was relinquished.
The consequences for meeting any 1 of the 3 conditions are as follows:
(a) Assets will be deemed to have been sold at fair market value on the date before relinquishing citizenship/residency and the deemed gain (in excess of a certain threshold ($711,000 for 2018) will be included in the calculation of expatriation tax.
(b) Any ineligible deferred compensation item (e.g., deferred compensation plan of a foreign employer) will be deemed to have been realized and becomes taxable in the expatriation tax calculation.
Streamlined Filing Compliance Procedures
Streamlined Foreign Offshore Procedures cater to U.S. expat taxpayers who can satisfy all of the following eligibility requirements*:
· During at least 1 of the most recent 3 delinquent tax years, the individual was physically present outside the U.S. for at least 330 days and the individual did not have a permanent abode in the U.S.
· The individual had income from “foreign financial assets” that had not been reported to tax and may also have non-compliance for report of foreign bank and other financial accounts.
· The non-compliance was not due to willful conduct.
If the individual satisfies all 3 conditions, he or she will need to file income tax returns for the most recent 3 tax years and, if required, reports of foreign bank and financial accounts for the most recent 6 reporting years.
Under the Streamlined Filing Compliance Procedures, if there is tax due on any of the income tax returns submitted, the taxpayer is only required to pay late payment interest on the outstanding tax liability. All other non-compliance penalties will be waived.
*While this is not intended to be a comprehensive list of criteria and the rules for eligibility are subject to change, these conditions must be met in order to be eligible for the Streamlined Foreign Offshore Procedures.
Relief Procedures for Certain Former Citizens
Relief Procedures for Certain Former Citizens is designed for those who have already relinquished their U.S. citizenship. Certain conditions must also be met in order to take advantage of the procedure:
(A) The individual’s net worth on the date when he/she gave up the citizenship and at the time of submission under this procedure was less than $2 million.
(B) The aggregate tax liability for the year of expatriation and the 5 preceding tax years was less than $25,000.
(C) Taxpayer must not have filed a U.S. income tax return as a U.S. citizen.
As with the Streamlined Filing Compliance Procedures, no non-compliance penalties will be imposed on the outstanding tax liability shown on the tax returns submitted.
Choosing between the two procedures
One of the main considerations comes down to how soon you would like to resolve the non-compliance (from a U.S. tax reporting perspective) and give up your citizenship.
The Streamlined Foreign Offshore Procedures require* that you file income tax returns for the most recent 3 delinquent tax years (assuming that you can meet the eligibility requirements). As of today (November 1, 2019**), these 3 tax years would be 2016 to 2018. To avoid being hit by condition (3) of the expatriation tax rules mentioned above, you will have to continue to file tax returns for 2019 and 2020 before you can renounce your citizenship in 2021 (you will also have to file a tax return for 2021).
The Relief Procedures for Certain Former Citizens allows individuals to renounce citizenship before addressing the non-compliance. In addition, unlike normal filing or the Streamlined Filing Compliance Procedures, a social security number is not required to perform income tax or other information reporting.
*Numbers shown in the article are as of date of publishing (11/20/2019) and subject to change.
