Can an individual renounce their U.S. citizenship, and what are the associated tax consequences?
Renouncing U.S. citizenship constitutes a significant personal and financial undertaking. While the procedural steps are relatively straightforward, individuals who choose to renounce citizenship must comply with rigorous tax regulations enforced by the U.S. government. It is imperative to gain a comprehensive understanding of the renunciation process, the qualifications for designation as a “covered expatriate,” and the required tax documentation before and after expatriation.
Renunciation of U.S. Citizenship
U.S. citizens may voluntarily renounce their citizenship at a U.S. Embassy or Consulate outside the United States. The process requires:
- A personal appearance before a U.S. consular officer.
- Completion and signing of the necessary forms to confirm intent.
- Payment of the renunciation fee (currently USD $2,350).
- Official recognition of renunciation by issuance of a Certificate of Loss of Nationality (CLN) from the U.S. Department of State.
Please note that renunciation does not absolve individuals of prior tax obligations; U.S. tax compliance is required through the date of expatriation.
Tax Obligations Associated with Renunciation
Renunciation of citizenship initiates a final set of IRS obligations under expatriation tax regulations.
This includes:
1. Filing Your Final U.S. Tax Return
A final tax return must be submitted for the year in which expatriation occurs. Additionally, individuals must have filed tax returns for the five years preceding the year of renunciation.
2. Filing Form 8854 – Expatriation Statement
Form 8854 serves to verify the following:
- The date of your expatriation
- Your total assets
- Your income for the previous five years
- Whether you qualify as a covered expatriate
Completion of this form allows the IRS to determine whether the Exit Tax is applicable.
Definition of a “Covered Expatriate” in 2025
An individual is classified as a covered expatriate under any of the following conditions:
A. Net Worth of $2 Million or More
This encompasses all global assets.
B. Average Annual Net Income Tax Liability Exceeding the 2025 Threshold
For the year 2025, this threshold is estimated to be between $199,000 and $203,000, subject to annual inflation adjustments.
C. Non-Compliance With U.S. Tax Filing Requirements for the Previous Five Years
Failure to meet filing requirements for even a single year within this period will result in classification as a covered expatriate.
Covered expatriates may owe Exit Tax.
Overview of the Exit Tax
Covered expatriates are subject to IRS regulations that treat all assets as if they were sold on the day prior to expatriation.
For tax year 2025:
- The gain exclusion amount, which is not subject to taxation, is anticipated to be approximately $866,000, adjusted for inflation.
- Gains exceeding this threshold may be subject to capital gains tax rates.
Assets subject to inclusion comprise:
- Real estate
- Investment holdings
- Shares in privately held entities
- Retirement accounts
- Business interests
Certain asset types, such as IRAs and 401(k)s, may be considered fully distributed as of the expatriation date.
Expatriation for Non-Covered Individuals
If you are not classified as a covered expatriate, renunciation does not trigger taxable consequences. However, you are required to:
- Submit Form 8854
- File your final dual-status tax return
Upon completion of these requirements, your obligations to U.S. taxation typically conclude.
Other Tax Considerations
1. Future U.S. Income Subject to Non-resident Taxation
Following expatriation, individuals are regarded as foreign nationals with respect to U.S. income, and generally face the following requirements:
- 30% withholding on passive income
- Potential eligibility for treaty benefits
- Possible reporting obligations using Form 1040-NR
2. Changes to Inheritance Tax Regulations
If a U.S. person provides a gift to a former citizen, they may incur additional tax liabilities and reporting duties.
Final Thoughts
Renouncing U.S. citizenship is entirely possible; however, it carries notable tax implications. The IRS mandates a final series of filings, and individuals may also be subjected to the Exit Tax depending on their net worth, tax history, and compliance with filing requirements.
As IRS Enrolled Agents with extensive experience in US 1040/1040NR personal tax compliance and FATCA Compliance FBAR Reporting, we are committed to providing our clients with timely, efficient, and cost-effective assistance.
