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Does renouncing U.S. citizenship cancel tax obligations?

| Sep 11, 2020 | International Tax Law

Some expatriates living abroad tire of paying income taxes to a country they no longer live and have no plans to return to. The simple solution would seem to be renouncing citizenship and be done with the tax obligation.

However, renouncing citizenship does not automatically nullify tax obligations. Until the expatriate files a Form 8854 with the IRS and the Treasury Department and is tax compliant for the last five years, he or she is a U.S. citizen obliged to pay taxes.

What is a covered expatriate?

Failure to fulfill the above guidelines leads the government to classify the renouncing citizen as a covered expatriate. All covered expatriates must pay an Exit Tax upon all assets and tax on gifts to U.S. persons. It may also lead to an audit. However, the covered expatriate designation does not mean the exiting citizen has not fulfilled their previous legal tax obligations. It also applies to:

  • Those whose annual income is higher than $162,000 over the preceding five years.
  • Their net worth is more than $2 million at the date of the expatriation.

Most who renounce their citizenship do everything in their power to avoid the label of a covered expatriate. Doing so enables them to have a clean break from the U.S. government.

Legal guidance may be necessary

Those living abroad often have complicated financial arrangements. So working with a tax law attorney with experience representing clients abroad can make a complicated and potentially frustrating experience go more smoothly. They can work with the client to help reduce unnecessary expenses and obligations in renouncing their citizenship and avoid other legal difficulties that may come with the covered expatriate designation.