Renouncing US citizenship or giving up a green card: why and how to consider it

US citizenship or permanent resident status
allows access to the largest economy in the world. Why would an American citizen living in the United Arab
Emirates, or a Saudi Arabian resident with a US “green card,” ever consider
giving up US status? Increasingly, the answer is one word: tax. 

Unique among global powers, the
United States taxes the worldwide income
of its citizens and green card holders no matter where they
live. US citizens who do not call America home also face the spectre of estate
and gift taxes following them outside US borders.

Indeed, it is possible for a person who has
never been to the United States to be subject to annual US income tax and
information-reporting obligations, gift taxes on large gifts made during life,
estate tax upon death, and hefty monetary penalties for noncompliance.

For example, many children born abroad to US
parents are automatically US citizens, and they must file US tax returns if
they earn income or have non-US bank accounts.

Almost all individuals born in the United
States are also US citizens and subject to US tax, even if they left as infants
and have never returned. Swearing allegiance to another country by itself does
not end US citizenship. Similarly, a green card must be formally
relinquished for both tax and immigration purposes; simply giving the card to a
US Customs official or waiting for it to expire is not sufficient to terminate
US tax status.

For residents of Gulf Cooperation Council
states—where there is no personal income tax and thus no credit to be claimed
for non-US taxes paid—US status can mean a large tax bill. Additionally, no GCC
states allow dual citizenship, so often US individuals living in the Gulf
region must choose between US citizenship and citizenship in their country of
residence.   

None of this is new, but what is novel is
increased and more sophisticated enforcement. The US Foreign Account Tax Compliance Act (FATCA) went
into full effect on July 1, 2014, mandating international
information-sharing on US individuals with non-US bank accounts.

All GCC states except Oman currently
participate in FATCA information exchanges with the US Internal Revenue Service
(IRS). US individuals living in the Gulf region may be
facing sleepless nights in anticipation of a notice from the IRS asking
why they have not filed tax returns. The solution to this predicament
often comes in the form of renouncing US citizenship or turning in one’s green
card.

But doing so carries serious consequences,
including tax and immigration traps. Any GCC resident considering renunciation must decide if it is
the right choice and then get competent advice before going through
the process. Renouncing US citizenship is permanent: once the
US Department of State issues a Certificate of Loss of
Nationality (COLN), the only way to regain US status is through the long
and difficult process of naturalization.

Further, patriotism aside, US citizenship
does provide certain benefits that can prove very valuable depending on an
individual’s circumstances: protection and consular services abroad, the right
to vote in US elections, access to the US job market, and an unquestionable
right to travel to the United States at any time. Renouncing provides
relief from the US tax regime, but it is not for everyone.

If a GCC resident decides to renounce,
he or she must take precautions to avoid the imposition of the US exit tax. Under a
law in effect since 2008, a renouncer can become a “covered expatriate” by
failing one of three key tests. If a renouncer is deemed a covered
expatriate, he or she is treated as having sold all property for “fair
market value” the day before renunciation and is taxed on the built-in gain in
those assets (with the first $713,000 USD of gain excluded as of 2018).

Gifts that the covered expatriate later makes
to US citizens or residents during life or after death also become taxable in
the hands of the recipient at a rate of about 40%. A renouncer becomes a
covered expatriate when he or she has a net worth of $2 million USD
or more at the time of renunciation; has an average annual US
net income tax liability of more than $165,000 in
the five years ending before the date of expatriation; or
fails to certify to the IRS that he or she complied with all US federal tax obligations
for the five years preceding the date of expatriation.

There are limited exceptions to the US
exit tax. The most important is that a renouncing individual who was
born a dual citizen and who still lives in his or her country of dual
citizenship is not subject to the net worth or tax liability
tests.

Individuals who have just turned 18 also
enjoy some special exemptions as it is generally difficult to renounce as a
minor and a parent or guardian cannot renounce on a child’s behalf.
Every renouncer will always be subject to the compliance test. Thus,
avoiding the exit tax requires that a renouncing individual be
US tax-compliant in all circumstances. 

Assuming that a renouncer takes the
tax compliance steps needed to avoid imposition of the exit tax,
the actual process of renouncing one’s US citizenship also has immigration issues of which to be wary.

The US Immigration and Nationality Act includes a provision (known as the “Reed
Amendment”) that denies a former citizen reentry to the
United States if the US Attorney General determines
that the individual renounced for the purpose of avoiding US tax. This is
an example of why potential renouncers need qualified advisors: what a
renouncer says during his or her exit interview at a US embassy or
consulate is critical. 

In the end, renouncing US citizenship requires careful consideration.
US immigration and
tax pitfalls are scattered throughout the process, so both understanding
the repercussions of renouncing and
proceeding carefully are imperative to a smooth
departure from the US club and its membership fees.

In November, Moodys
Gartner Tax Law
will present complimentary seminars in Abu Dhabi, Doha, Dubai,
and Riyadh on the main topics of interest concerning the
renunciation of US citizenships. Register to learn how your decision to (or not to)
renounce will impact you today and in the future.