Approximately nine million U.S. citizens live or work abroad, and some want to renounce their U.S. citizenship. Many do so with regret but renounce to avoid various financial issues. Others consider themselves “accidental Americans” who maintain no connection with the United States.
While the reasons for renouncing U.S. citizenship vary, issues include:
- The United States levies taxes on those who meet the established thresholds based on citizenship regardless of where they live and regardless of whether they maintain strong ties to the United States.
- The 2010 Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report accounts held by U.S. citizens to the IRS, leading some foreign banks to eschew doing business with U.S. citizens – including giving loans or mortgages.
- Under FATCA and the long-standing requirement for reporting foreign financial accounts, Report of Foreign Bank and Financial Accounts (FBAR), certain U.S. citizens must report financial assets that are held abroad to the IRS or risk civil or criminal penalties.
- Simply preparing all the necessary filings can be costly.
- U.S. citizens living abroad can be subject to capital gains tax on their primary residence because the U.S. government considers the home foreign property.
The cost has led former U.S. citizens who have renounced their U.S. citizenship to file a class action lawsuit to recover almost $1,900 each in fees they paid for the renunciation. Until 2010, there was no fee involved. In 2010, a $450 fee was imposed. Four years later, in 2014, the fee jumped to $2,350. The suit alleges that the fee violates the Administrative Procedures Act because it is arbitrary and capricious. The plaintiffs allege the fees go well beyond the actual cost to the Department of State to process the renunciations, which the State Department contests. They also claim the fee violates their constitutional right to expatriate. If the case succeeds, some 30,000 former U.S. citizens who renounced their U.S. citizenship could be eligible for refunds. In the meantime, the State Department is considering reducing the fee back to $450.
The case was filed in the U.S. District Court for the District of Columbia. While the judge questioned whether the former U.S. citizens had standing to sue, he ultimately held the case was in the wrong forum and had to be brought in the Court of Federal Claims.
The decision to renounce U.S. citizenship comes with pros and cons that can vary person to person. It is a complex decision that requires careful consideration of the legal, financial, and even emotional implications. It is crucial to seek professional tax and immigration advice.
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