Renouncing US citizenship: Why are Americans abroad doing it?

Olivier Wagner, founder of 1040 Abroad, a tax firm helping US expats become tax compliant, explores why so many Americans see a benefit in giving up their US citizenship.

Between three and six thousand Americans have cut ties with the US each year since 2013, with many pointing to tax obligations for citizens abroad as the reason.

With an estimated three to nine million US citizens living abroad, this figure might not stand out. However, compared to most other developed countries, renouncing US citizenship is surprisingly common.

While the number of relinquishments is only three times higher than in the 1970s, it’s still up sharply from lows in the 1990s and 2000s. So, what’s driving this upward trend? It might, in part, be due to many US citizens feeling that their government doesn’t truly represent them.

However, it seems likely that the real driving factors are frustrations over tax burdens, complex reporting requirements, and the long reach of US financial regulations. Additionally, accepting employment with a foreign government can complicate tax obligations and further motivate the decision to renounce.

US taxes: They’re taxing

While tax season can be stressful for many, it’s even more complicated for Americans living abroad. Surveys suggest that nearly a quarter have considered giving up their US citizenship. Among those looking to renounce, more than four in 10 cite US tax filing requirements as the main reason.

The United States is one of only two countries requiring citizens to file taxes regardless of where they live. Each year, expats are tasked with reporting their worldwide income, including wages, benefits, rental income and business profits. The rule means expats may have to file and pay taxes in two countries.

Even though the IRS offers help, such as foreign income exemptions and tax credits, a lot of expats still find the reporting requirements too much to handle.

“Many expats just want to live a normal financial life,” says Wagner. “It’s safe to say the vast majority of Americans living abroad are what we consider "middle class". We’re not talking about billionaires living on yachts.”

“Accidental Americans”

Tax liabilities are often unclear, even for US citizens living abroad, with around two-thirds unaware they need to file US tax returns.

However, lawyers say that many of the citizenship relinquishments are driven by so-called “accidental Americans” - people who grew up abroad and had no idea their US citizenship came with tax responsibilities.

Between 2010 and 2015, getting a CLN (Certificate of Loss of Nationality) became increasingly difficult, with long wait-lists, sky-high fees and tricky tax rules. For many accidental Americans, this made it even harder to renounce citizenship.

Legal experts say these barriers could violate the US’s international law commitments. Lawmakers from other countries have also urged the US government to scrap the fees, taxes, and other requirements, especially for accidental Americans who don’t have much connection to the US.

Beyond the tax return

As a US expat, once your foreign bank account reaches 10.000 US dollars (9.700 euros), you’re required to file the FBAR (Foreign Bank Account Report) with the US Treasury Department.

Some expats also need to disclose other foreign financial accounts, like savings or investments. For example, if you have 5.000 US dollars (4.650 euros) in savings and 4.975 US dollars (4.626 euros) in investments, but your investments rise to 5.025 US dollars (4.673 euros) at any point during the year, you’ll need to report both accounts.

The FBAR deadline is April 15, with an automatic extension until October 15 if it’s missed. Some expats with accounts above certain limits also need to file Form 8938. This form is designed to catch people hiding money in overseas accounts.

Single expats need to file if their foreign accounts:

• contain over 200.000 US dollars (186.000 euros) at the end of the year; or
• exceed 300.000 US dollars (279.000 euros) during the year.

Couples need to file if their foreign accounts:

• contain over 400.000 US dollars (372.000 euros) at year-end; or
• exceed 600.000 US dollars (558.000 euros) during the year.

Help is at hand

If you’re finding it tough to file your US taxes each year, don’t worry - you’re not alone. Hiring a specialised US tax advisor can make all the difference. That way, you can keep your US citizenship and not lose your mind at the end of every tax year!

The experts at 1040 Abroad are here to guide you through your tax obligations, tailored to your unique situation. Book a call with them today and start your journey to tax compliance.