Why Do Americans Renounce Their Citizenship? Tax Expert Rob Wood Has the Answer
The last several elections have featured pronouncements by a number of people saying they would move to Canada if the wrong candidate won. No one knows how many of them really moved. However, there are Americans who renounce their citizenship, and in most cases, politics has nothing to do with the matter. Tax lawyer Rob Wood explains that federal tax laws are the reason for many Americans to give up their US citizenship.
Wood says that, on average, about 5,000 people have renounced their citizenship each year for the last few years. That represents an increase over many prior years. The 2017 number was slightly lower than 2016. A lot of the activity is attributable to changes in the tax laws. Wood says that renunciation is not something someone does lightly.
Renunciation is typically done by someone who has another citizenship. Sometimes, the person renouncing does not even live in the USA. The group includes “accidental” Americans who were born here, Wood notes, but who have no emotional connection to the US and who do not really need their US citizenship.
Wood says that he views this issue from a tax perspective, given his work as a tax lawyer. The clients he sees are people who have another a citizenship and who live mostly or entirely outside the USA. For these people, the paperwork involved with being a US citizen abroad is a big job, given the requirement to disclose foreign bank accounts and foreign assets to the IRS. These are usually people who are paying taxes in another country but who still have to satisfy IRS requirements. This is the predominant reason Wood encounters among clients who decide to renounce their US citizenship. Note: there is no requirement for a person to give a reason for renouncing citizenship.
Wood adds that the rules also apply to green card holders who are simply giving up their cards. Most of these people are long-term card holders who have been in America for eight years or more. Green card holders are, in Wood’s experience, more likely to give up the card than are US citizens to renounce their citizenship.
As to cost, renunciation can be expensive. Wood says that there is a $2,350 filing fee for the process. This is much more than most countries charge. The bigger cost may be tax-related. In order to renounce, one must be in IRS tax compliance. This probably involves getting tax advice, and one is required to have five years of certified compliance in order to renounce. There is also a potential exit tax. Someone with less than $2 million in assets will generally not need to pay the tax. People who qualify for the exit tax are taxed as though the assets were sold and taxed as capital gains.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.