Giving Up U.S. Citizenship: Why and How

Giving Up U.S. Citizenship: Why and How

There are many reasons why someone may want to give up their US citizenship. One of them is taxation. 1040 Abroad is here to explain the reasons people give up U.S. citizenship and how to do it.

According to the Department of State, 6,705 Americans gave up their citizenship in 2020 alone. Compared to the 2,577 people who gave up their US citizenship in 2019, that number has increased by 260%.

The renunciation of citizenship is a means of giving up citizenship that takes effect on the date of the interview at the U.S. consulate. A person who gives up U.S. citizenship will lose many benefits in the U.S., including voting rights, protection from foreign governments, and the ability to pass U.S. citizenship to their children. The main benefit of U.S. citizenship is still the right to live and work in the United States as desired. As a result, people who renounce U.S. citizenship tend to have established lives in their host country.

Why do Americans give up their U.S. citizenship?

Of course, there are many reasons why someone might want to give up U.S. citizenship, including personal and political reasons. In cases where their new country does not allow dual citizenship, the decision to relinquish U.S. citizenship becomes a logical next step.
However, more and more people are choosing to renounce their U.S. citizenship for tax purposes. U.S. citizens living abroad are subject to a series of laws that require them to report all of their worldwide income to the U.S. Internal Revenue Service, and even pay taxes in the United States, in addition to the country where they live. Although there are mechanisms to reduce this obligation, such as the Foreign Earned Income Exclusion and the Foreign Tax Credit, simply filling out these forms, or paying a professional to do so, is enough to lead Americans to relinquish their citizenship, especially in cases involving a foreign (non-US) company or trust.
Another factor behind this trend is the Foreign Account Tax Compliance Act (FACTA), which has made it difficult for U.S. citizens to maintain overseas bank accounts since 2010. This change in legislation is seen as the one of the main reasons for dropping out in recent years.

How to give up U.S. citizenship?

Renouncing U.S. citizenship is an important step. If you are considering renouncing your U.S. citizenship, you should follow the steps below.

The renunciation will have certain formalities. Essentially, it is important that it is done on purpose and that you understand the meaning of this action, including that this action is irreversible. Then the following year you file the final tax return. The person must appear in person at the U.S. Embassy or Consulate. The main purpose of the interview will be to ensure that the above conditions are met (that the person understands the implications of giving up citizenship and acts of their own free will).

5 steps to renouncing U.S. citizenship

Five basic steps must be taken to complete this process.
1. Meeting with a professional (CPA or lawyer)
While every U.S. citizen has the right to relinquish their citizenship, you should first speak to an expert who will describe the impact the decision may have on you and your family.
2. Make sure you get your next citizenship
Once the renunciation process begins, you need to make sure that you have stable immigration status (i.e. citizenship) in your new country. If this makes you stateless, it is usually not possible to renounce your citizenship. Although holding a passport in your new country is not mandatory, the process of relinquishing US citizenship can be very difficult if you cannot travel.
3. Processing of the renunciation form
The next step is to download and prepare the US renunciation form. Prior to the appointment, only one document should be prepared, namely Form DS-4079, requesting the determination of a possible loss of US citizenship. You can easily download it online.
4. Organize and attend your renunciation meeting
The next part is to organize and attend the appointments. The wait time at the consulate can be very long, so it is wise to plan ahead. If the wait time in your city is particularly long, you can consult consulates in other cities to see if the wait time will be shorter. When you go to the appointment, remember to bring some important documents and your DS-4079 form, including your birth certificate,
U.S. passport, ID card, and new passport.
5. Complete your income tax return
To complete your renunciation, you must complete your U.S. tax affairs. Your final tax return must be submitted by June 15 of the following year. You will attach IRS Form 8854 to it.

American citizen living abroad? 1040 Abroad can help you prepare your taxes in the United States, offering fixed prices for their expert services for expats. If you are considering relinquishing your U.S. citizenship, they can even help you sort out all your tax affairs before you take the plunge. Contact us for more information.