Tax Tips for U.S. Americans Abroad
Are you an Accidental American or American abroad considering giving up your US citizenship? The IRS has created a new program in September for relief procedures for certain former citizens who have/intend to relinquish their passport and American citizenship.
This new program is for people who also wish to become tax compliant with their US income tax. Plus, avoid being taxed as a “covered expat” too.
Therefore, it is possible to give up your citizenship. But you need to take responsibility for what you need to catch up with. We’ll highlight exactly what that is below:
Background Info about US Citizenship
According to the United States Constitution, the 14th Amendment states that “all persons born or naturalized in the United States” are citizens of the country.
However, there are people who were born in the US with something called diplomatic agent level immunity. This is an international law that gives a degree of protection from certain laws in the country to people.
All in all, as a fact, everyone born in the US obtains US citizenship.
Someone who is born abroad from at least one US parent can acquire American citizenship at birth. This is only, however, if the parent takes the necessary steps to make it so. Usually, this means the parent has to register their child at the US Embassy in the foreign country that they gave birth in.
Additionally, some people may be Accidental Americans. Accidental Americans are citizens who were born in the US to foreign parents OR were born outside the country to American parents and are unaware of their status as US citizens.
By law, all US citizens are supposed to report and pay their (worldwide) taxes to the IRS every year. This means that even if you live abroad in Germany as a US citizen, you still have to file every year. So, if you want to renounce your citizenship, you have to make sure you’re all up to date on paying and filing your US taxes.
With the rise of FATCA in 2010, foreign banks and institutions need to determine their customers are US Americans abroad. If yes, they will need to report certain information about the customer’s account to the IRS every year. It’s to prevent money laundering in “offshore” bank accounts. So that’s why if you are opening a foreign bank account as a US expat and show your US passport, the teller may let out a groan knowing the paperwork involved in the process!
Relinquishing Your US Citizenship
It is possible to renounce American citizenship, as long as you are an adult and comply with the requirements with the US Citizenship laws and policies. (This is definitely different than the naturalization to become a US citizen.)
For those with US citizenship abroad, you must commit to one of the expatriate acts voluntarily. Plus have the intent to give up citizenship.
For example, American expats who want to renounce US citizenship must do three things. One is to appear in person before a US consular or diplomatic officer. If you are living abroad, this means going to the US Embassy or Consulate. The second is to sign an oath of renunciation.
Renouncing your citizenship can only be done in person. Letting go of it means you will be deemed “stateless” and lack protection from the US government. Also, you will need to give up your passport, which is a requirement when traveling anywhere in the world.
As you can imagine, one can experience great hardships when relinquishing one’s US citizenship. It can affect your ability to rent property, marry, receive medical care, and attend school.
The Price to Give Up US Citizenship
The price to give up your citizenship is a hefty $2,350. This is a big fee, but if someone is serious to give up citizenship, they will pay the cost. It’s bigger than the cost of rent per month in a foreign country.
Keep in mind that reliving your US citizenship for tax purposes can negatively impact your ability to travel within the US. For starters, you will have no residence in the United States. Then if you believe you will want to work in the US again or may need to visit people there in the future, your loss of nationality with the country may not be a recommended idea.
Many expats still keep US citizenship in order to pass it on to their children in the future. This allows them to may have access to the US job market when the time comes. Additionally, if a child has US citizenship through their parent, they can get a driver’s license, work and live easily in the States.
Furthermore, all US children with valid SSN under the age of 17 may enable US expats to get up to $1,400 in refundable tax dollars per year. You can read more about the Additional Child Tax Credit here.
Stipulations for Certain Former Citizens in Need of Tax Relief
There are a few stipulations in place to satisfy tax compliance rules through this new program. According to the IRS, in order to qualify for penalty and tax relief, it’s imperative each US Certain Former Citizen meets the requirements:
- A net worth of less than $2 million at the time you expatriated to another country
- Expatriated after March 18, 2010
- Aggregate tax liability of $25,000 or less in the year of expatriation and the previous five years
Something else to be aware of is what the IRS explains on their website.
“The procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns, and Report of Foreign Bank and Financial Accounts and pay taxes and penalties for the years at issue were due to non-willful conduct.”
This means that people who qualify for relief procedures must be taxpayers. More specifically taxpayers who failed to file and pay taxes in the past (but not on purpose!). They also must be willing to make up for it.
Need Time to Think?
Considering giving up your citizenship as an American abroad? You’ll need to be careful and really put in the time to think about it. Once it is relinquished the action is permanent. Thus, if you are considering this decision, you can reach out to us at MyExpatTaxes to discuss your options.
Otherwise, we would be more than happy to help you catch up on back taxes. We help Americans abroad every week become tax compliant through the Streamlined Procedure and with personalized support.
At our company, we scour and examine the complexities of IRS and state tax laws. This is to ensure our software can maximize your benefits as a US expat. Plus, taxes are boring, yet our intuitive expat tax software isn’t. We only use straight-forward and relevant questions so that you can easily prepare your return. Then, rest assured we check our tax calculations and you’ll be able to review your draft tax return before submitting.