Should You Keep Your U.S. Citizenship When Moving Overseas?

The vast majority of Americans who move overseas keep their U.S. citizenship. But in recent years, the number of Americans who choose to renounce theirs has risen sharply. While only a few hundred Americans based abroad did so annually in the first decade of the 2000s, 6,705 gave up their citizenship and passport in 2020. Why? A big reason is the burden of being subject to tax in two different countries. A new report by International Living provides guidelines for potential expats to consider whether giving up U.S. citizenship is the right solution—or not.

A new report from International Living addresses the question: Does it make sense for Americans considering a move overseas to renounce their U.S. citizenship? 

“Most of the roughly nine million U.S. citizens living abroad opt to keep their U.S. passports,” says Jennifer Stevens, Executive Editor, International Living. “But, if U.S. federal taxes on the wealthiest increase, they may choose in greater numbers to first get a second citizenship and then, in turn, renounce their U.S. citizenship.

“At International Living, we’re already seeing an increase in interest for information about second passports. Now, to be clear, there are other reasons to get a second passport—increased flexibility in travel and residence among them—but it is also the first step a person has to take if they’re considering giving up their U.S. citizenship. After all, once they’ve turned in their U.S. passport, they have to have somewhere to go.”

While only a few hundred Americans based abroad renounced their citizenship annually in the first decade of the 2000s, a whopping 6,705 gave up their citizenship and passport in 2020. 

“While expatriating (renouncing your citizenship) is a step not to be taken lightly, the data say that increasing numbers of Americans are willing to take that step, nonetheless,” says Jeff D. Opdyke, editor of Global Intelligence Letter, a publication of International Living. “If taxes on the wealthy surge, I wouldn’t be surprised to see expatriation step up even higher.

“In particular, if you’re an American who’s approaching the exit-tax limit of $2 million in global wealth, I can see a case for pursuing expatriation before your wealth exceeds the limit. And I think there is a fair number of Americans who are thinking about this right now.”

“Frankly, we’re still in the early stages of this game,” Opdyke says. “Over the remainder of this decade, as America’s debt explodes higher, I think we’re going to see increased taxation demands and a realization that the only way to avoid the crisis to come is to get out of the blast zone. And for many Americans, that will mean expatriating to a more tax-friendly country.”

U.S. citizens are taxed on their worldwide income, no matter where they reside. For retirees—whose tax liability tends to be lower than that of working Americans—this is typically not problematic. But as remote working gains popularity, the question of what to do about U.S. citizenship becomes more pressing for more people.   

This new International Living report written by Mark Nestmann, author of The Lifeboat Strategy, provides some guidelines to consider when renouncing U.S. citizenship can make sense.

The Dreaded Exit Tax

According to International Living’s report, a 2008 law imposes an “exit tax” on “covered expatriates” (defined below), which applies to both U.S. citizens and long-term residents—green card holders who have lived in the United States for eight or more of the 15 years prior to expatriation.

The exit tax is based on a legal fiction that you sell all of your worldwide property at its fair market value on the day before you expatriate. Tax on the fictional gain is payable at the time your tax return is due for the year of expatriation. You can defer payment by posting acceptable security with the Treasury Department and paying an interest charge on the amount deferred.

Only individuals defined as “covered expatriates” are potentially subject to the exit tax. You’re in this category if you:

  • Have a global net worth exceeding $2 million (not adjusted for inflation); and/or
  • Had an average annual net income tax liability for the five preceding years ending before the date of the loss of U.S. citizenship or residence exceeding $172,000 (2021 threshold, adjusted annually for inflation); and/or
  • Fail to certify under penalty of perjury that you have complied with all U.S. federal tax and reporting obligations for the five years preceding expatriation.

Withholding Tax on Pensions, Social Security, and Non-Grantor Trusts

Distributions from pensions or deferred compensation plans to non-U.S. persons— i.e., individuals who are neither U.S. citizens nor permanent residents— are taxed very differently than similar payments to U.S. persons. In most cases, they’re subject to a 30% withholding tax. Social Security benefits are withheld at a flat rate of 25.5%.

Distributions from a non-grantor trust are also withheld at a 30% rate. 

These withholding taxes can only be recovered under the provisions of a tax treaty in effect with the country where you now reside. But if you’re a covered expatriate, you can’t use the treaty to reduce this withholding tax. You could be forced to pay tax twice—once in the country where you reside, plus the 30% tax imposed by the U.S. The total tax could easily exceed 50%.

Traditional IRAs fare even worse if you’re a covered expatriate. IRA payments to a non-U.S. person are generally withheld at the 30% flat rate. But if you’re a covered expatriate, the full value of tax deferred holdings in traditional IRAs and other “specified tax deferred accounts” is subject to income tax, as if you received that income the day prior to expatriation. 

…And Don’t Come Back!

An often-overlooked nuance to expatriation is that you might not be able to ever return to the United States, even to visit. You’ll need a visa to re-enter the United States unless you have a passport from a visa waiver country.

The visa application process requires that you visit a U.S. consulate for a personal interview. Consular officers are required to assume that applicants for visitors’ visas are lying about their intention to leave the United States after their temporary stay. The burden of proof is on you to demonstrate that you will return to your home country. Any remaining ties to the United States make it more difficult to establish that intent.

Expatriation is a big decision. If you expect income from a U.S. source such as IRA or Social Security payments, it’s unlikely to be your best option.