Over the years, our clients have come to us with a number of incorrect preconceived notions about relinquishing their U.S. citizenship. Most of the misinformation comes from individuals not qualified to offer international tax advice. Nevertheless, these unqualified individuals self-publish articles on the internet, which leads many to believe these myths regarding what expatriates can and cannot do after relinquishing their passport.
Myth # 1: You Have to File Tax Returns for 10 Years After Renunciation
Once you relinquish your U.S. citizenship, your tax residency terminates as of that date; even if it’s in the middle of the tax year. You’re only liable for tax up to that date. Your final tax return will also include IRS Form 8854 to determine your exposure, if any, to the U.S. Mark-to-Market “Exit” Tax.
Myth # 2: The IRS Taxes All of Your Wealth Upon Renunciation
If your net worth is less than $2m (Net Worth Test) and your average federal income tax liability (Tax Liability Test) was less than $160,000 over the last 5 years, you are not exposed to the Exit Tax. If, however, you meet one of the tests above, you are a “covered expatriate.” This doesn’t automatically mean you have to pay the Exit Tax. The Exit Tax only targets built-in gain of your worldwide assets. Thus, if you recently used cash to make a substantial investment, the Exit Tax only taxes the built-in gain, which may be minimal depending on the length and performance of the investment. If, however, you own a family company that was started several decades ago, you are most definitely exposed to the Exit Tax and would need to engage our firm for pre-expatriation tax planning. We’ve had several clients whose net worth exceeded $100m, and, with our team handling their tax planning, even they did not have to pay any Exit Tax.
Myth # 3: Renunciation Means You’re Banned from the U.S.
While a few ideologues in the United States Senate have proposed changes to immigration laws that would make non-compliant expatriates ineligible for reentry, the law does not apply to individuals that lawfully expatriate and fulfill all of their tax filing requirements, such as filing a final tax return along with IRS Form 8854 to evidence compliance with the Exit Tax provisions.
Furthermore, the vast majority of our clients choose to obtain citizenship in a country that’s a member of the U.S. Visa Waiver Program that allows citizens of those countries to enter the U.S. without first obtaining a visa. And some of those countries have extremely favorable tax regimes for expatriates as a way of attracting wealth to their countries.
According to Ksenia Maiorova, an internationally recognized Immigration Attorney based in Miami, individuals who have renounced their U.S. citizenship have a variety of options available to them for visiting the United States after expatriation. Maiorova explains, “The timing of the renunciation is crucial, and a strategic plan developed by an experienced immigration attorney can help you avoid the undesirable outcome of rendering the renouncing party stateless; having no country of residency or citizenship. Specifically, it is important to keep in mind that in most countries, you would have to obtain permanent residency prior to being eligible to acquire citizenship. During this permanent residency period, you remain a citizen of your country of origin, or, if you no longer hold citizenship from your country of origin, you could be regarded as stateless, which can create considerable difficulties with respect to travel outside your new country of residence.”
Maiorova further explained “Once a former U.S. citizen acquires citizenship in the country to which he expatriated, he will be considered a citizen of that country for the purpose of any travel to the United States. Therefore, you will generally be eligible to apply for any type of U.S. visa that is available to citizens and nationals of your new country of citizenship, provided that the purpose of your intended visit is consistent with the eligibility requirements of the visa and you can demonstrate sufficient ties to your new country of citizenship. For the purposes of brief trips to the US to visit friends and family, the B1/B2 visitor/tourist visa or entry on the Visa Waiver Program is typically the most appropriate.”
“If citizenship is acquired in a country that is a party to the U.S. Visa Waiver Program, you may be able to visit the United States for business or pleasure for a period of up to 90 days without the need to apply for a tourist visa. The Visa Waiver Program does, however, require prior registration with the U.S. Department of Homeland Security’s Electronic System for Travel Authorization. Importantly, the 90 day period of stay on the Visa Waiver Program cannot be extended and employment or study within the U.S. is not allowed. If your new citizenship does not render you eligible for entry on the Visa Waiver Program, you may travel to the United States for business or pleasure on a B1/B2 visitor visa. Application for this type of visa is made at the nearest U.S. Consulate and requires proof of sufficient ties to the country of citizenship. U.S. Consulates have considerable discretion with respect to the grant of visas, and a former U.S. citizen is not guaranteed reentry to the U.S. after expatriation. A recent example of a discretionary denial of a tourist visa involves, Roger Ver, an early investor in Bitcoin, who renounced his United States citizenship in 2014. Ver, now a citizen of Saint Kitts and Nevis, applied for a tourist visa to the U.S. in early 2015. His application was denied, citing a catch-all provision of law that relates to “immigrant intent.” That is, the Consul determined that Ver did not have sufficient ties to Saint Kitts and Nevis that would demonstrate that he does not intend to remain in the United States illegally. Under the doctrine of Consular Non-Reviewability, appeals of a discretionary consular denial are virtually impossible, therefore anyone considering expatriation from the U.S. should carefully weigh the benefits against the risk of not being able to return to the United States, even for a brief visit.” Maiorova elaborated.
Therefore, it’s clear that there are options for returning to the U.S. after expatriating. It’s imperative upon any individual considering expatriation to contact and consult with attorneys that are experts in this particular field prior to taking any action.
Myth # 4: Renouncing Means Losing Social Security and Medicare
This is entirely false. You will still be entitled to social security and Medicare after you expatriate. For Medicare, you would have to obtain medical services while in the U.S., but social security payments can be made to you anywhere in the world. After expatriation, there will be a 30% withholding tax imposed on 85% your social security benefits; however, you can recover most of the withholdings after you file your Form 1040NR, Nonresident Income Tax Return, so it’s not too much of an issue.
Myth # 5: Hostile Interview Prior to Renouncing
This is entirely false as well. Although you will be required to schedule an appointment at an embassy for the purpose of expatriating, you simply fill-out a few forms, sign the “oath of renunciation,” and hand them over to the official along with your U.S. passport. As long as you have all documentation at the meeting, it’s a quick process that most people find astonishingly simple.
To learn more, contact our firm today. Although we only have physical offices in Washington DC, Miami, Orlando, and Dallas, we’ve served thousands of clients all over the world in conjunction with our partner firms in over 130 countries.
* The attorneys at Castro & Co. would like to thank Ksenia Maiorova and her firm, Maiorova Law Group, for their invaluable contributions to this article. If you would like to contact an attorney at the Maiorova Law Group, call them at 407-705-3345.