Relinquishing citizenship is a decision that should not be taken lightly. The first step of renouncing one's U.S. citizenship is to make sure you are compliant with your previous five year's of tax filings. Renouncing without first becoming compliant with the U.S. tax requirements, can be costly. Before formally renouncing your citizenship, consult a U.S. CPA to make sure your U.S. tax obligations are in order.
As a U.S. citizen relinquishing citizenship, you may be subject to an ‘expatriation tax” if any of the following statements apply:
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($168,000 for 2019).
- Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate” subject to an “expatriation tax.” The expatriate tax is a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code.9
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